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Focal points and fiscal discipline. ACES Cases No. 2013.2

Kelemen, R. Daniel and Teo, Terence K. (2013) Focal points and fiscal discipline. ACES Cases No. 2013.2. UNSPECIFIED.

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    Abstract

    Many studies suggest that balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Typically, this is explained as a result of a legal deterrence logic, in which the threat of judicial enforcement deters sovereigns from violating the rules. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on US states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.

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    Item Type: Other
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > fiscal policy
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > American Consortium on European Union Studies > ACES Cases
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 12 Jan 2015 13:46
    Number of Pages: 40
    Last Modified: 12 Jan 2015 13:46
    URI: http://aei.pitt.edu/id/eprint/59154

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