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An assessment of Stability and Growth Pact Reform Proposals in a Small-Scale Macro Framework

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This paper contributes to the debate on fiscal governance for the European Monetary Union, assessing the different fiscal rules currently discussed. We simulate a small scale macroeconomic model with forward looking agents, augmented with a public finances block. We account for both the positive (output stabilization) and negative (via risk premia) effects of debt and deficit. By the appropriate choice of the exogenous fiscal variables, in the fiscal block, we replicate the working of the rules embedded in the so-called "fiscal compact": a balanced budget rule (the "new golden rule"), and the debt reduction rule (to reach 60% of GDP in 20 years). We compare these rules with the Maastricht 3% deficit limit (status quo), and with an "investment" rule leaving room for public investment. We evaluate the performance in terms of output loss during a fiscal consolidation, as well as following demand and supply shocks in steady state. All rules guarantee long run sustainability. The investment rule emerges robustly as the one guaranteeing the lower output loss, followed by the status quo. The "fiscal compact" rules appear to be recessionary

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2012-04.

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Date of creation: Feb 2012
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Handle: RePEc:fce:doctra:1204

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Keywords: Fiscal Rules; Small scale Macroeconomic Models; golden rule; fiscal consolidation; EMU economic governance; fiscal compact; Dynare;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. On Fiscal Rules and the Need for Reforming the Stability Pact
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-02-27 13:25:47
  2. Should the Stability and Growth Pact be strengthened?
    by laurence-df in OFCE le blog on 2012-02-29 14:52:21
  3. Fallait-il renforcer le Pacte de stabilité et de croissance ?
    by laurence-df in OFCE le blog on 2012-02-27 16:53:17
  4. On Fiscal Rules and the Need for Reforming the Stability Pact
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-02-27 13:25:47
  5. On Fiscal Rules and the Need for Reforming the Stability Pact
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-02-27 13:25:47
  6. L’austérité plus que toujours en question
    by jcbriquet in Ressources pour économistes on 2012-04-17 11:32:27
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Cited by:
  1. Jérôme Creel & Paul Hubert & Francesco Saraceno,, 2013. "Assessing future sustainability of french public finances," Documents de Travail de l'OFCE 2013-11, Observatoire Francais des Conjonctures Economiques (OFCE).

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