The EU’s New Expenditure Rule and Its Implications for Monetary Policy

Vasilki Dimakopoulou, George Economides and Apostolis Philippopoulos

No 12139, CESifo Working Paper Series from CESifo

Abstract: This paper investigates whether the new expenditure rule of the European Union (EU) can restore dynamic stability and determinacy with bounded public debt in an otherwise unstable economic environment. We build upon the standard New Keynesian dynamic general equilibrium model so as to compare our results to the well-known results of Leeper (1991, 2016) and, more generally, to the literature on the fiscal-monetary policy mix. We find that the EU's new fiscal rule, despite its intentions, works practically like active fiscal policy. Given this, it does not leave room for active monetary (interest rate) policy; instead, the central bank has to accommodate the active fiscal policy which means that the policy interest rate can react only weakly to inflation. This will undermine the ECB's key mandate.

Keywords: fiscal rules; macroeconomic policy assignment (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12139

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