Nonlinearity, Endogeneity, and Interaction: Implications for European Reform of Budgetary Rules

Alessandro Bellocchi () and Giuseppe Travaglini
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Alessandro Bellocchi: University of Urbino Carlo Bo

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2024, vol. 10, issue 2, No 3, 519-550

Abstract: Abstract EU fiscal rules have been suspended until 2024. European policymakers are considering whether to reinstate the existing fiscal rules or to define a new framework. Member States must have enough fiscal space. But the sustainability of public debt must be safeguarded. We use a nonlinear dynamic model to test if a primary balance adjustment rule can preserve debt sustainability in the presence of interactions between fiscal policy, economic growth, and interest rates. We find that a dynamic adjustment rule to changes in debt service can reduce the equilibrium debt ratio, even stabilizing the associated risk premium.

Keywords: Public debt sustainability; Nonlinearity; Endogeneity; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 H60 H61 H62 H63 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40797-023-00253-3

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