 Large Scale Fiscal Retrenchments: Long-Run Lessons from the Stability PactAndrew Hughes Hallett and Peter McAdam () No 1843, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: This paper examines the potential consequences of imposing a ‘stability pact’ on the fiscal convergence criteria for monetary union. Various versions of the stability pact are possible. We examine the consequences of reducing the target deficit ratio to 1% and of refundable fines for those who exceed the 3% limit, specified in the Maastricht Treaty. We also consider the possibility of targeting structural, rather than actual, deficits. We find tax increases are necessary, and would have to be permanent, if the proposed deficit reductions are to be sustained below the 3% limit. We also find that changes in the policy mix are necessary – a loosening in the real value of money relative to fiscal policy (but not necessarily in absolute terms) – to avoid liquidity shortages or a debt explosion. Finally, and by far the most important result, is a sharp rise in real interest rates. In the longer term, this destroys investment, employment and output capacity. That is a more serious cost than short-term losses in output itself. Keywords: capacity output; Fiscal-monetary interactions; Monetary Union (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1843 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.