EU fiscal rules have been suspended until 2024. European policymakers are considering whether to reinstate the existing fiscal rules or to define a new framework. Member States must have enough fiscal space. But the sustainability of public debt must be safeguarded. We use a nonlinear dynamic model to test if a primary balance adjustment rule can preserve debt sustainability in the presence of interactions between fiscal policy, economic growth, and interest rates. We find that a dynamic adjustment rule to changes in debt service can reduce the equilibrium debt ratio, even stabilizing the associated risk premium.

Nonlinearity, Endogeneity, and Interaction: Implications for European Reform of Budgetary Rules

Alessandro Bellocchi;Giuseppe Travaglini
2024

Abstract

EU fiscal rules have been suspended until 2024. European policymakers are considering whether to reinstate the existing fiscal rules or to define a new framework. Member States must have enough fiscal space. But the sustainability of public debt must be safeguarded. We use a nonlinear dynamic model to test if a primary balance adjustment rule can preserve debt sustainability in the presence of interactions between fiscal policy, economic growth, and interest rates. We find that a dynamic adjustment rule to changes in debt service can reduce the equilibrium debt ratio, even stabilizing the associated risk premium.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11576/2725511
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