Research Discussion Papers, Bank of Finland
No 7/2002:
Fiscal policy: Coordination, discipline and stabilisation
Anne Brunila
Abstract: The framework for fiscal policy coordination in EMU has
been in effect for three years. The experience gained shows that the
rule-based approach provides in principle a feasible solution for policy
coordination among a large number of heterogeneous countries whose joint
interest is to safeguard the credibility of the common monetary policy and
smooth functioning of the EMU. At the same time, the experience indicates
that the current set of rules and procedures laid down in the Maastricht
Treaty and Stability and Growth Pact (SGP) suffer from complexity, lack of
transparency and asymmetric incentives. The paper discusses the rationale
for fiscal policy coordination in the monetary union in general and
emphasises the role of fiscal rules and multilateral surveillance in
ensuring discipline and long-term sustainability of public finances. The
paper also considers incentive problems arising from the asymmetric nature
of the SGP and weak interaction between national policy-making and EU-level
policy commitments. As a possible remedy, the paper proposes complementing
the SGP with medium-term expenditure rules for central governments and
balanced budget requirements for lower levels of government.
Keywords: fiscal policy coordination; expenditure rules; Stability and Growth Pact; (follow links to similar papers)
JEL-Codes: H62; H63; (follow links to similar papers)
27 pages, April 30, 2002
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