Juergen von Hagen

Budget Processes and Commitment to Fiscal Discipline

This paper develops a political-economy model of the budget process focusing on the common pool problem of the public budget. We show that the externality arising from the fact that public spending tends to be targeted at individual groups in society while the tax burden is widely dispersed creates a bias towards excessive expenditures and debt. This bias can be reduced by introducing elements of centralization in the budget process, that is, institutional structures that strengthen a comprehensive view of the budget over the particularistic view of the spending ministers and the members of parliament. Using examples from EC countries, we show how budget processes lack or possess such elements. We then present empirical evidence supporting the claim that centralizing elements reduce the deficit bias. The last section concludes with models for reform of the budget process.

German dominance in the EMS: evidence from interest rates

Abstract The paper presents an empirical analysis of German dominance and asymmetries in the EMS based on a dynamic system of equations explaining national money market interest rates. The hypothesis of strict German dominance of the EMS is rejected. However, there are some noticeable asymmetries in the EMS. Germany is a relatively strong player and has been the least dependent country in the early phase of the system. Since 1983, German independence has diminished. In contrast, France throughout and Italy in the early phase of the EMS have been relatively weak players in the system.

Fiscal consolidations: Quality, economic conditions, and success *

Recent research has demonstrated theimportance of good quality of fiscaladjustments for the success of governmentbudget consolidations. We extend thisapproach to analyze the importance of theeconomic conditions in which fiscalconsolidations are started for theirsuccess. The cyclical positions of thedomestic and international economy, theinitial debt level and the stance of fiscalpolicy in the OECD are all importantdeterminants of the likelihood of fiscalconsolidations. They also affect thegovernments choice of consolidationstrategy, making them importantdeterminants of the success of fiscalconsolidations. In contrast, the monetarypolicy stance plays only a negligible rolefor fiscal consolidations. We use theanalysis to test for any Maastricht effectson the performance of European governmentsduring the 1990s. Such effects are weak atbest and occurred only during the firsthalf of the decade.

Central bank constitutions for federal monetary unions

Abstract In a monetary union the central bank constitution must distribute the power over monetary policy between the members and the administrative center of the union. We compare alternative distributions and evaluate their performance. Dominance of regional interests always leads to inefficient monetary stabilization policies. Whether or not dominance of regional interests leads to a higher long-run rate of inflation depends on the unions political constitution.

Reforming Budgetary Institutions in Latin America: The Case for a National Fiscal Council

Latin Americas economies have made tremendous improvements in recent years. Following the lost decade of the 1980s, economic growth has resumed. But the fruits of this progress remain to be consolidated. The political consensus supporting reform is fragile, and the economies of the region are still susceptible to destabilizing shocks, as recent events have underscored. Even well-devised economic policy strategies can be thrown off course by disturbances. This article proposes an institutional reform—a National Fiscal Council—designed to allow Latin American countries to break out of this vicious circle.

German dominance in the EMS

The paper assesses the merit of the view according to which the Bundesbank dominates monetary policy-making in the European Monetary System. Our tests give a strong rejection of German dominance and suggest, instead, that monetary policymaking in the EMS is interactive. There is evidence that the Bundesbank pursues her own policy goals in the longer run. But German independence does not imply German dominance.

Monetary union, money demand, and money supply: A review of the German monetary union

We present an empirical analysis of German money demand, money supply and monetary policy after German monetary union in 1990. Empirical models for velocity and forecast models for the money multiplier are estimated. Stability analysis reveals that structural stability of the demand for broad money after monetary union must be rejected; stability of the demand for narrow money can be accepted. East German portfolio adjustment with regard to the structure of monetary portfolios occurred quite rapidly. The increase in monetary control uncertainty caused by these adjustments did not, however, impede monetary targeting with reasonable precision.

Managing Capital Flows: Experiences from Central and Eastern Europe

The countries of Central and Eastern Europe went from being largely closed to being largely open to international capital flows. This paper discusses their experience with capital account liberalization and coping with large capital inflows. We start with a discussion of basic economic characteristics and the real convergence achieved so far, and then discuss the pace and sequencing of capital account liberalization and the degree of international financial integration over the past decade. We then analyze trends and patterns of capital inflows in these countries in recent years. These stylized facts are useful for understanding the macroeconomic implications and policy challenges of coping with large capital inflows, which we discuss next. Finally we conclude with policy implications for emerging Asian economies.

Regional Risksharing and Redistribution in the German Federation

We provide empirical estimates of the risksharing and redistributive properties of fiscal equalization among the states of the German federation. Fiscal equalization serves as a mechanism to insure state budgets against asymmetric revenue shocks, but provides almost no insurance against regional income shocks. Equalization responds only weakly to income differentials but strongly to tax revenue differentials across states. A further result is that the correlation of state tax revenues with state GDPs has declined over time. This may reflect a weakening in state tax efforts in response to the adverse incentive effects of fiscal equalization.

Fiscal restrictions and monetary union: Rationales, repercussions, reforms

We offer a critique of the fiscal preconditions for participation in Stage III of EMU and the Excessive Deficit Procedure of the Maastricht Treaty. We show that the high output costs associated with meeting the fiscal preconditions in Stage II and the incompatibility of the reference values for fiscal policy with other convergence criteria make it unlikely that a mechanical interpretation of those conditions will govern admission to Stage III. Knowledge of this fact will deter governments from undertaking major fiscal adjustments in the first place. Hence, the fiscal criteria of the treaty will not function as an efficient filter for distinguishing countries that are and are not prepared to live with the fiscal consequences of EMU.In Stage III, the function of the Excessive Deficit Procedure is to buttress the European Central Banks protection from demands for a central bank bailout in the event of a debt crisis in a participating state. We show that other aspects of EU fiscal structure, namely the retention by member states of the bulk of their own revenue-raising capacity, should suffice to restrain the demand for a central bank bailout and the pressure on the ECB to supply it. Until political union follows monetary union, leading to the centralization of fiscal functions and revenu-raising capacity in the EU itself, the Excessive Deficit Procedure will be redundant. If there remains any reason to doubt the credibility of the no-bailout rule, then the best way to buttress it is directly, by further insulating the ECB from pressure to extend a bailout.If it is felt that policy in EU member states is biased toward excessive deficits, then the appropriate place to address this problem is at the national level. A limited approach would involve steps to insure that negotiations over the budget occur in the context of a firm general constraint on the overall level of spending. A more far-reaching reform would involve the creation of National Debt Boards to offset the prevailing bias.