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Which is the optimal fiscal rule in a monetary union? Targeting the structural, the global budgetary deficit, or the public debt?

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  • S. Menguy

Abstract

The aim of our paper is to contribute to the debate on optimal fiscal rules in a monetary union: in terms of global budgetary deficit, of structural budgetary deficit, or of public debt. Indeed, these rules seem to be mixed in the framework of the European Economic and Monetary Union, with the new Fiscal Compact. With the help of a simple macroeconomic model, we show that a goal in terms of public debt is the most appropriate in order to decrease the indebtedness levels, but that it could increase the recessionary risks for the most indebted European countries. Goals in terms of global budgetary deficit or public debt are the most appropriate to limit the budgetary activism and to stabilize fiscal variables in case of demand or supply shocks. However, a goal in terms of structural budgetary deficit is the most appropriate in order to stabilize economic activity levels in case of asymmetric demand or supply shocks.

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  • S. Menguy, 2014. "Which is the optimal fiscal rule in a monetary union? Targeting the structural, the global budgetary deficit, or the public debt?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-21, December.
    • Handle: RePEc:taf:oaefxx:doi:10.1080/23322039.2014.932257
    DOI: 10.1080/23322039.2014.932257
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    Cited by:

    1. Nicolas Afflatet & Stephanos Papadamou, 2016. "Public debt and borrowing: Are governments disciplined by financial markets?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1225346-122, December.
    2. Paulo Vieira & Celsa Machado & Ana Paula Ribeiro, 2016. "Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union," EcoMod2016 9685, EcoMod.

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