- Moral Hazard in an Economic Union: Politics, Economics, and Fiscal Gimmickry in Europe
- Download: PDF 648.72 KB
- by Alt, James; Dreyer Lassen, David; Wehner, Joachim
- This paper examines empirically how transparency of the budget process affects fiscal
rules and incentives for fiscal gimmickry or creative accounting in the European Union. Using
stock-flow adjustment data for EU countries from 1990–2007, we show that pressure from a
deficit limit rule as in the Stability and Growth Pact creates incentives for fiscal gimmicks, as
does political pressure from the electoral cycle and economic pressure from negative shocks in
the business cycle. However, we show that where institutional transparency is higher, these
incentives are damped and largely disappear. We infer that fiscal rules do not work well when
institutional transparency is low.
- Publication Type: WCFIA Working Paper
- Published Date: July 2012
- Field of Interest: International Economics
- Alt, James, David Dreyer Lassen, and Joachim Wehner. "Moral Hazard in an Economic Union: Politics, Economics, and Fiscal Gimmickry in Europe." Working Paper 2012-0001, Weatherhead Center for International Affairs, Harvard University, July 2012.