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The interdependence of fiscal policies in the European Union is examined using real-time data concerning primary cyclically adjusted deficit. The study determined how available information is incorporated into fiscal plans and how revised data are affected by unplanned developments.

This paper analyzes the incentives of a government facing electoral uncertainty to implement structural reforms in the presence of a deficit restriction. In designing a reform package, the government faces a trade-off between enhancing its electoral chances by providing compensation to private individuals and the cost of violating the deficit restriction. Ceteris paribus, tighter sanctions, more volatile macroeconomic shocks and lower income inequality worsen the trade-off. JEL classification: E62; H11; H30; H50 Keywords: Structural reforms; Deficit restriction; Compensation; Elections; Stability; Growth pact

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2005.05.009 Byline: Roel M.W.J. Beetsma (a), A. Lans Bovenberg (b) Abstract: We explore the dynamics of public debt and optimal institutions in the presence of political shocks arising from electoral uncertainty. Under commitment, optimal stabilization is established by combining an inflation target with a debt target. The inflation target should be contingent on the political shocks while the debt target forces the government to fully absorb the political shocks in the period in which it occurs. In the absence of such inflation and debt targets but with monetary commitment, a conservative central bank enhances stabilization. An even more conservative central bank is optimal if monetary policy cannot commit. Author Affiliation: (a) University of Amsterdam, CEPR and CESifo, The Netherlands (b) Tilburg University and CEPR, The Netherlands Article History: Received 14 November 2002; Accepted 9 May 2005

We study optimal monetary and fiscal stabilization policies in a two-country, micro-founded model of a monetary union featuring price rigidities, monopolistic competition and (inefficient) mark-up shocks. With symmetric rigidities, fiscal policy is not employed in stabilizing union-level variables. Countries' relative spending levels, however, are used to stabilize relative inflation rates and the terms of trade. Under commitment, both monetary policy and relative spending are inertial, while this is not the case under discretion. Numerical analyses indicate substantial welfare gains from commitment and from fiscal stabilization. We conclude by investigating some simple monetary and fiscal policy rules. JEL classification: E52; E61; E63; F41 Keywords: Optimal monetary and fiscal policies; Mark-up shocks; Commitment; Discretion; Monetary union; Policy rules

An evaluation of differences in tax rates for companies in countries belonging to the Organization for Economic Cooperation and Development is provided.

We explore endogenous monetary unification in the context of a model in which a country with serious structural distortions (and, hence, high inflation) is admitted into a monetary union once its economic structure has converged sufficiently towards that of the existing participants. If unification is reversible, so that the new entrant can always be forced to leave the union again later, convergence stops for a while after the high-inflation country has joined. With irreversible unification, in contrast, temporary divergence occurs, and unification will be delayed. JEL classification: E61; E63; F33 Keywords: Monetary unification; Structural distortions; Inflation; Convergence

Imposition of exchange rate bands depends on the type of shocks to be handled. In a first-best case, imposition of a band is not desirable even though no welfare losses occurs during money demand shocks. In a second-best case in which there is monetary accomodation restriction, combining an exchange rate system with a band is beneficial since it allows authorities to trade off boundary interventions with suboptimal intervention policy when the exchange rate is inside its band.

A policy game model with elements from Alesina and Tabellini's (1987) model, explains the institutional design of the European Monetary Union (EMU) in terms of monetary and public debt policies. The model shows that coordinated policies by policy-makers can restrain debt accumulation, while asset accumulation replaces commitment to restrictive monetary policies. It also shows the need to supplement monetary institutions of myopic governments with public debt target to prevent a conservative central bank from excessive debt accumulation.

H. Jensen's loss of monetary discretion model was extended to show that a zero-inflation rule may be much favorable compared to monetary discretion if real base money holdings are relatively low, which is expected in modern economics. There is a greater possibility that the zero-inflation rule will be favored if the emphasis on achieving public spending and output goals is reduced. Thus, the recent increase in the support for binding policy rules is in accordance with the reduced tolerance to inflation.

Three target zone models for reproducing stylized facts of weekly deutsche mark exchange rates in the European Monetary System (EMS) from Jan. 1987 to Aug. 1992 were compared using Monte Carlo analysis. The potential impact of the presence of currency bands in the EMS is investigated by comparing the results of tests against the unit root hypothesis, non-normality and conditional heteroskedacity with the test results for dollar exchange rates against EMS currencies.