Choosing the European Fiscal Rule

Ginters Buss, Patrick Grüning and Olegs Tkacevs

No 75, Dynare Working Papers from CEPREMAP

Abstract: In order to contribute to the ongoing discussions at the European Union level about the potential simplification of its fiscal framework, we evaluate the economic and public finance stabilization properties of two benchmark fiscal rules using a New Keynesian small open economy model. If these fiscal rules are implemented one at a time, having just an expenditure growth rule tends to yield more stable macroeconomic outcomes but more volatile public finances, as compared to having only a structural balance rule. Much of the quantitative differences in relative volatilities can be accounted for by using a modified public expenditure definition in the expenditure growth rule, in particular the removal of debt service payments. Strong-enough debt correction for either fiscal rule contains public debt volatility at little expense to long-run macroeconomic stability. There is also a welfare gain for households from having only an expenditure growth rule.

Keywords: Fiscal policy; DSGE; Small open economy; Fiscal-monetary policy interaction (search for similar items in EconPapers)
JEL-codes: E27 E32 E62 E63 F41 H63 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2022-07
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cpm:dynare:075

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