TY  - JOUR
AU  - Casella,Alessandra
TI  - Tradable Deficit Permits:  Efficient Implementation of the Stability Pacin the European Monetary Union
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7278
PY  - 1999
Y2  - August 1999
UR  - http://www.nber.org/papers/w7278
L1  - http://www.nber.org/papers/w7278.pdf
N1  - Author contact info:
Alessandra Casella
Department of Economics
Columbia University
420 West 118 Street
New York, NY 10027
Tel: 212/854-2459
Fax: 212/854-8059
E-Mail: ac186@columbia.edu
AB  - Borrowing from the experience of environmental markets, this paper proposes a system of tradable deficit permits as an efficient mechanism for implementing fiscal constraints in the European Monetary Union: having chosen an aggregate target for the Union and an initial distribution of permits, EMU countries could be allowed to trade rights to deficit creation.  The scheme exploits countries' incentives to minimize their costs, is transparent, flexible in accommodating idiosyncratic shocks and allows for adjustments in case of Europe-wide recessions.  In addition, it need not treat all countries identically and can be designed to penalize countries with higher debt to GDP ratios. Finally, the scheme rewards countries for reducing their deficit below the initial allowance, lending credibility to the Stability Pact's goal of a balanced budget in the medium run.
ER  -