A simple and flexible alternative to Stability and Growth Pact deficit ceilings. Is it at hand?

We model a monetary union where fiscal discretion generates excessive debt accumulation in steady state and inefficiently delayed debt adjustment following shocks. By setting a debt target and raising the political cost of deviating from the optimal pace of debt reversal¸ institutional design induces fiscal policymakers to implement unbiased responses to shocks. This is partly achieved by increasing the transparency of the decision-making process. We therefore call for more focused supervision tasks for the European Commission and for parliamentary discussion whenever a disagreement arises between the Commission and a national government.

► EMU fiscal policies are often expansionary in good times and vice versa. ► Transparency allows national voters to discipline fiscal decisions. ► We advocate a transparent flexible debt targeting approach. ► Emu institutions should enforce the transparency of fiscal decisions. ► We outline a proposal for improving the transparency of the current EMU institutional framework.