DP1247 Fiscal Policy and Monetary Union: Federalism, Fiscal Restrictions and the No-Bailout Rule

Author(s): Barry Eichengreen, Jürgen von Hagen
Publication Date: September 1995
Keyword(s): Fiscal Federalism, Fiscal Restraints, Monetary Union
JEL(s): F33, H62, H63, H74, H77
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1247

Avocates of formal fiscal restraints on the member states of the European Monetary Union often argue that US experience proves that a monetary union needs such constraints to guarantee the stability of the common currency. We show, first, that the origin of formal fiscal restraints on US state governments is unrelated to monetary questions. Second, we show that the same is true for similar constraints in Australia. Third, we show that the incidence of fiscal restraints is strongly correlated with the central government's ownership of the national tax base. The implication for Europe is that fiscal restraints are unnecessary as long as the EU retains a high degree of fiscal decentralization.