The European Stability Pact and the Effect of Uncertainty on the Debt and Deficit Ratios

Jonathan Rubin
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Jonathan Rubin: Institute of Economics, University of Copenhagen

No 96-25, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: Proposed regulations aimed at promoting fiscal discipline among states participating in the Economic and Monetary Union (EMU) employ dept-to-GDP and deficit-to-GDP ratios as criteria for fiscal performance. Countries participating in EMU are expected to maintain these criteria or be subject to pecuniary sanctions. To provide a framework for an economic analysis of this proposed "stability and growth pact", this paper examines the dynamics of these interdependent ratios. The model demonstrates that the time path for the debt/GDP ratio is highly sensitive to the assumptions made about economic growth and the evolution of the debt/GDP ratio differs markedly from that predicted by a deterministic model. We quantify the effect of stochastic variability and its implications for the kind of regulations now being proposed.

Pages: 27 pages
Date: 1996-12
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:9625

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