The Prudence Principle: A New Framework for Eurozone Fiscal Policy

Eric Lonergan () and Mark Blyth ()
Additional contact information
Eric Lonergan: M&G Investments
Mark Blyth: Brown University

No 6, Working Papers from Forum New Economy

Abstract: This working paper is an intervention into the on-going debate over the future of fiscal rules in the European Union. It argues that rather than writing down rules and expecting the world to conform to them, a better approach is to make the concept of ‘fiscal space’ operational by tying it explicitly to rates of interest on government debt. This permits huge flexibility in the size of the deficit, in the debt/GDP ratio, leaves inflation targeting to the central bank, and guarantees debt sustainability. It would also provide clarity to the public that the government is honoring its word.

Keywords: debt; fiscal policy; monetary policy; interest rates; functional finance (search for similar items in EconPapers)
JEL-codes: E5 E58 E62 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2021-12
New Economics Papers: this item is included in nep-ban, nep-eec, nep-mac and nep-mon
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https://newforum.org/wp-content/uploads/2021/12/FNE-WP06-2021.pdf First version, 2021 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:agz:wpaper:2106

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