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Public Deficits and Economic Growth

Oscar Afonso

The implementation of fiscal discipline within the European Monetary Union has been a controversial topic of discussion these last years. Among the main questions in debate, we find the possibility of considering some kind of public expenditures as "pertinent" and thus justifying, at least temporarily, the non-compliance to the fiscal discipline rules. This kind of situation has been considered by the reform of the Stability and Growth Pact, namely with expenditures resulting on human capital accumulation (e.g., innovation and training). We analyse this particular issue, by considering a framework with two countries that form a monetary union and that may differ in economic dimension and level of development. We show that: (i) a temporary excessive deficit allowing a strong human capital accumulation in the small and less developed country helps to build economic and social cohesion within the union, without having major external negative effects; (ii) the pertinence of such an excessive deficit is more questionable when a big and developed country is considered.

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