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A Simple Proposal for a 'Debt-Sensitive Stability Pact'

Francesco Saraceno () and Paola Monperrus-Veroni

Macroeconomics from University Library of Munich, Germany

Abstract: The main rationale for fiscal policy rules is the concern for long term sustainability of public finances, that in a monetary union may affect the other members. Among many other criticisms, the Stability and Growth Pact (SGP) has been seen as contradictory or incomplete because it focuses on deficit rather than debt, the main indicator of public finances' soundness. Furthermore the few references to debt that were present in the treaties are essentially ignored in actual practices. Some of the reform proposals that came out lately have addressed the issue, and tried to embed a debt criterion in the Pact. We review these proposals, and put forward our own proposed modification: the deficit ratio countries should target is weighed by their relative debt. With respect to the other proposals taking into account debt, our own has the advantages of simplicity, symmetry, and low arbitrariness. To make it politically acceptable to high debt countries, nevertheless, could require to set the targets, at least initially, at level higher than the Maastricht criteria

Keywords: Stability Pact; Fiscal policy; Debt Sustainability (search for similar items in EconPapers)
JEL-codes: E62 H63 H87 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2004-06-02
New Economics Papers: this item is included in nep-ifn
Note: Type of Document - pdf; pages: 11
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