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Debt rule design in theory and practice: the SGP’s debt benchmark revisited

Sebastian Hauptmeier and Christophe Kamps ()

No 2379, Working Paper Series from European Central Bank

Abstract: This paper is linked to two debates on fiscal policies: first, the implications of low interest-growth differentials for debt sustainability 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 Stability and Growth Pact's 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 the low-growth low-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 objective; 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. JEL Classification: E62, F42, H61, H62, H63, H87

Keywords: fiscal governance; fiscal policy; fiscal rules; interest rates; public debt sustainability (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-eec and nep-mac
Note: 538998
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202379

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