Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 633: Improving the SGP: Taxes and Delegation rather than Fines

Assar Lindbeck () and Dirk Niepelt ()
Additional contact information
Assar Lindbeck: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Dirk Niepelt: Institute for International Economic Studies, Postal: Stockholm University, SE-106 91 Stockholm, Sweden

Abstract: We analyze motivations for, and possible alternatives to, the Stability and Growth Pact (SGP). With regard to the former, we identify domestic policy failures and various cross-country spillover effects; with regard to the latter, we contrast an "economic-theory" perspective on optimal corrective measures with the "legalistic" perspective adopted in the SGP. We discuss the advantages of replacing the Pact's rigid rules backed by fines with corrective taxes (as far as spillover effects are concerned) and procedural rules and limited delegation of fiscal powers (as far as domestic policy failures are concerned). This would not only enhance the efficiency of the Pact, but also render it easier to enforce.

Keywords: Stability and Growth Pact; Spillover Effects; Policy Failures; Pigouvian Taxes; Policy Delegation

JEL-codes: E63; F33; F42; H60

24 pages, December 14, 2004

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