The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability

We study how constrained fiscal policy can affect macroeconomic stability and welfare in a two-region model of a monetary union with sticky prices and distortionary taxation. Both government spending and taxes can be used to stabilize regional variables; however, the best welfare outcome is obtained under some tax variability and constant regional inflations. We use a variety of rules to characterize constrained fiscal policy and find that strict fiscal rules coupled with a monetary policy that targets union-wide inflation result in regional inflation stability and the welfare costs of such rules are not as unbearable as one would expect. Fiscal authorities can enhance welfare by targeting the regional output gap, while targeting regional inflation is less successful since inflation stability is guaranteed by the central bank.     

Choosing the size of the public sector under rent seeking from state coffers

This paper incorporates rent seeking from state coffers into a general equilibrium model of economic growth and endogenous policy. Self-interested individuals try to extract, for personal benefit, part of tax revenues that could be used to finance public investment. We solve for a non-cooperative Nash equilibrium in individual agents' behavior. The determinants of rent seeking in general equilibrium are identified and we consider the efficient size of public sector given the rent-seeking activity. Cross-country data from 108 rich and developing countries provide support for our predictions.     

The social cost of rent seeking in Europe

Direct measurement of the social cost of rent seeking is impeded by non-observable and non-reported activities. We use a dynamic stochastic general equilibrium model to compute the social cost of rent seeking in Europe. Our estimate is based on competition among interest groups for privileges provided by governments, including income transfers, subsidies, and preferential tax treatment. The model, which is calibrated to the euro area as a whole and also to individual euro member countries for 1980–2003, performs well vis-à-vis the data. We find that significant proportions of GDP are extracted as rents available to be sought by rent seekers.