Debt policies in the aftermath of COVID-19 — The SGP’s debt benchmark revisited

Sebastian Hauptmeier and Christophe Kamps ()

European Journal of Political Economy, 2022, vol. 75, issue C

Abstract: The post-COVID-19 period is likely to be characterised by an intensified stabilisation-sustainability trade-off. This paper revisits the design of the Stability and Growth Pact’s debt rule in the context of two debates on fiscal policies: first, the implications of the low interest environment for debt sustainability and the appropriate interaction of fiscal and monetary policies and, second, the reform of the EU fiscal governance framework. In both debates the choice of government debt anchor and the speed of adjustment take centre stage. The debt rule appears predestined to fulfil the role of debt anchor. However, our analysis shows that its existing design gives rise to a pro-cyclical bias that has hampered its implementation in a low-growth and inflation environment. We propose two parametric changes to better balance the objectives of macroeconomic stabilisation and debt sustainability: first, accounting for persistent deviations of inflation from the central bank’s target; and, second, a reduced speed of adjustment. Putting a reformed debt rule at the centre of the EU fiscal governance framework would allow reducing the latter’s complexity without the need to revise the EU Treaties.

Keywords: COVID-19; Debt overhang; Interest rates; Fiscal policy; Public debt sustainability; Fiscal rules; Fiscal governance (search for similar items in EconPapers)
JEL-codes: E62 F42 H61 H62 H63 H87 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:75:y:2022:i:c:s0176268022000064

DOI: 10.1016/j.ejpoleco.2022.102187

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