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This paper splits the ex post error in the budget balance, defined as the final budget figure minus the planned figure, into implementation and revision errors, and investigates the determinants of these errors. The implementation error is the difference between the nowcast, published toward the end of the year of budget implementation, and the planned budget, while the revision error is the difference between the final figure and the nowcast. The split takes account of differences in reporting incentives at the different budgeting stages. The predictive content of fiscal plans is important, because it determines the reliability of the budget, while that of the nowcasts is important also because these figures are an input for the next budget and may contain important signals about the fiscal stance. Implementation and revision errors may arise for political and strategic reasons. Our results suggest that an improvement in the quality of institutions, whether measured by the tightness of national fiscal rules, the medium-term budgetary framework or budgetary transparency, increases the quality of budgetary reporting at both the planning and the nowcast stage. This supports the recently adopted requirements on national fiscal frameworks. It also strengthens the case for a close monitoring by the European Commission of national budgeting. (JEL E6, H6), I. INTRODUCTION The budget process consists of three stages. The first stage is the planning stage, (1) while the second stage is the implementation stage, which leads to the real-time [...]

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1468-0335.2008.00685.x Byline: ROEL M. W. J. BEETSMA ([dagger][double dagger]), A. LANS BOVENBERG ([double dagger]) Abstract: We investigate intergenerational risk-sharing in two-pillar pension systems with a pay-as-you-go pillar and a funded pillar. The funded pension pillar can be either defined contribution or defined benefit. Only a defined-benefit scheme with an appropriate investment policy establishes optimal intergenerational risk-sharing. We show how the pension system affects capital markets in general and the equity premium in particular. Author Affiliation: ([dagger])University of Amsterdam ([double dagger])Tinbergen Institute, Netspar, CEPR and CESifo Article History: Final version received 27 August 2007.

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

The paper proposes a theoretical model of fiscal policy offering new insights on some of the key policy trade-offs involved in the recent reform of the Stability and Growth Pact. As suggested by the proponents of the reform, greater room for case-specific economic judgment in the implementation of the pact may improve welfare. In our model, these gains occur because the consolidation path implied by the implementation of the pact does not discourage high-quality measures. In practice, however, the difficulty to extract true policy intent from budget figures may hinder the qualitative assessment of fiscal policy. Hence, reforming a rules-based fiscal framework with a view to enhance its 'economic rationale' would also require closer monitoring, a better grasp of the policies underlying the budget, and ultimately stricter enforcement. In that sense, recent reforms are at best unhelpful. JEL classification: E62; H6 Keywords: Fiscal rules; Stability and growth pact; Waivers; Deficits; Structural reforms

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

This paper analyzes in detail the mechanisms behind fiscal stabilization policy and the role of policy commitment in a micro-founded New-Keynesian model of a two-country monetary union, which is hit by supply shocks. We also explore the determinants of the gains from fiscal stabilization. While monetary policy with identical union members is concerned with stabilizing the union-wide economy, fiscal policy aims at stabilizing inflation differences and the terms of trade. Besides exploring optimal policies, we also consider monetary and fiscal rules. We study these rules both under coordination and non-coordination by the fiscal authorities. Keywords: Optimal monetary and fiscal policies; Rules; Commitment; Discretion; Monetary union JEL classification: E52; E61; E62; E63; F33

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

We show how a stability pact based on deficit sanctions eliminates the exacerbation of debt accumulation that may arise from monetary unification. Moreover, with sanctions contingent on the observed state of the economy, the pact avoids aggravating the situation of a country in recession. Moral hazard problems arise if the state also depends on unobservable, politically costly fiscal effort. This could explain why sanctions under the actual Stability and Growth Pact are only automatically waived in extreme recessions and why the procedure linking observed deficits and sanctions involves a long and detailed assessment of a country's situation. Keywords: Stability pact; Monetary union; Public debt; Contingent deficit sanctions; Fiscal effort JEL classification: E42; E61; F33

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

The state-contingent nature of the optimal monetary policy adopted by a conservative central bank in the persistence of employment as proposed by Lars Svensson may undermine its credibility according to Roel Beetsma and Henrik Jensen. The optimal rule, however, is possible with state-independent delegation incorporated into Svensson's model. Thus, the elimination of the state-contingent inflation bias allows the central bank to perform policy according to Svensson's rule.

With benevolent policymakers and fiscal leadership, monetary unification reduces inflation, taxes and public spending. These disciplining effects of a monetary union, which become stronger if the number of participants in the union increases, are likely to raise welfare. Two types of arrangements are considered for the union's common central bank (CCB): making the CCB more conservative and imposing an inflation target on the CCB. In contrast to the results of Svensson (1997) [Svensson, L.E.O., 1997. Optimal inflation targets, 'conservative' central banks, and linear inflation contracts. American Economic Review 87, 98-114], an optimally designed, conservative CCB may outperform inflation targeting. Finally, we find that fiscal coordination offsets the disciplining effects of monetary unification. Hence, subsidiarity in fiscal policymaking may enhance welfare. Keywords: Monetary union; Fiscal leadership; Common central bank; Discipline; Central bank conservatism; Inflation (targets); Optimal institutions; Fiscal coordination

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.

The role of expectations is examined in terms of a 'good' equilibrium model for public debt management. In the model, equilibrium is defined by a low debt interest rate as investors expect minimal repudiation from a government which has no incentive for it. The integration of heterogeneity for nominal debt holdings generates conflict over government revenue. Under such conditions, equilibria is defined by agent wealth.

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.

We document an empirical puzzle for EMS exchange rates during a period in which the bands on these exchanges rates were (almost) credible, i.e. exchange rate distributions are hump-shaped rather than U-shaped as predicted by the standard target zone model. We offer an explanation of this puzzle which is based on the combination of two realistic features, namely the presence of intramarginal interventions and wage/price sluggishness.

The combination of discretionary monetary policy, labor-market distortions, and nominal wage rigidity yields excessive inflation as monetary policy tries to exploit nominal wage contracts to address labor-market distortions. An inflation target reduces inflation, but creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. Preventing the associated excessive accumulation of public debt calls for debt ceilings. If countries differ substantially in terms of structural distortions, uniform debt ceilings must be complemented by country-specific debt targets in order to prevent decentralized fiscal authorities from employing debt policy strategically. [ABSTRACT FROM AUTHOR]

Several analyses are conducted to explain the macroeconomic costs, as well as the benefits related to the EuropeEs monetary unification (EMU). The various implications caused by the disagreement caused between the monetary and fiscal authorities are also analyzed. (JEL: E31 , E52, E62, F33, F36)

We use data from a television game show involving elementary lotteries as a natural experiment to measure risk attitudes. Unique features of our data set are the substantial monetary stakes and the large sample size. CRRA and CARA utility specifications perform approximately equally well. We find robust evidence of substantial risk aversion. Extensions of the basic model, which allow for a separate utility flow purely from playing the game or for decisions based on decision weights instead of actual probabilities, raise the estimated degree of risk aversion.

Monetary unification will result in the accumulation of public debt if discretionary monetary policy leads to inflation bias. Debt ceilings are useful in preventing excessive accumulation of debt in a monetary union by permitting an independent central bank to implement price stability measures. Debt targets that constrain stabilization policies help in preventing the excessive variability of public debt resulting from supply shocks.

Collusion between company directors and management can benefit stockholders if high firing costs are avoided.