Do Balanced Budget Rules Work? U.S. Experience and Possible Lessons for the Emu

41 Pages Posted: 11 Aug 2000 Last revised: 16 Jun 2021

See all articles by Robert P. Inman

Robert P. Inman

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: November 1996

Abstract

The `Excessive Deficit Procedure' of the Maastricht Treaty on Economic and Monetary Union proposes two fiscal convergence conditions for entry and continued membership in the EMU: 1) a country's overall budget deficit for each fiscal year must be equal to or below 3% of GDP, and 2) a country's stock of gross public debt must be equal to or less than 60% of GDP. Will the current EMU Excessive Deficit Procedure work as an effective constraint on countries' deficit behaviors? When understood within the context of a political economy model of deficit behavior, recent U.S. evidence on balanced budget rules strongly suggests that effective deficit constraints must use ex post deficit accounting, must be constitutionally grounded, must be enforced by an open and politically independent review panel or court with significant sanctions for violations, and costly to amend. While ex post, constitutionally grounded, and difficult to amend, current EMU rules are not enforced, at present, by an open and politically independent review panel using significant penalties. The ability of the EMU's deficit procedure to constrain in doubt. Institutional reforms that will strengthen the EMU's balanced budget procedures are discussed.

Suggested Citation

Inman, Robert P., Do Balanced Budget Rules Work? U.S. Experience and Possible Lessons for the Emu (November 1996). NBER Working Paper No. w5838, Available at SSRN: https://ssrn.com/abstract=225624

Robert P. Inman (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-8299 (Phone)
215-898-8200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
75
Abstract Views
1,385
rank
379,956
PlumX Metrics