Policy mix and debt sustainability: evidence from fiscal policy rules

Peter Claeys

No ECO2005/01, Economics Working Papers from European University Institute

Abstract: This paper characterises rules-based fiscal policy setting. Basically, we translate a standard monetary policy rule into a simple fiscal policy rule. We then infer on fiscal policymakers' reaction coefficients by testing the rule with GMM. Interaction is also tested directly by the inclusion of monetary policy setting. Our results qualify existing evidence on systematic fiscal policy in two respects. First, fiscal policy usually stabilises public debt. And there is indeed substantial interaction between fiscal and monetary policy via the debt channel. Second, sustainability is achieved with a "stop-go" cycle of consolidation. Unless debt ratios were high, consolidation did not come at the cost of less cyclical stabilisation.

Keywords: Monetary policy; fiscal policy; policy interaction and policy rules; debt sustainability (search for similar items in EconPapers)
JEL-codes: E61 E63 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Policy mix and debt sustainability: evidence from fiscal policy rules (2006)
Working Paper: Policy Mix and Debt Sustainability: Evidence from Fiscal Policy Rules (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2005/01

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