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

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Abstract

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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Bibliographic Info

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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References

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  1. Jeremy Rudd & Karl Whelan, 2003. "Can rational expectations sticky-price models explain inflation dynamics?," Finance and Economics Discussion Series 2003-46, Board of Governors of the Federal Reserve System (U.S.).
  2. Maritta Paloviita, 2008. "Comparing alternative Phillips curve specifications: European results with survey-based expectations," Applied Economics, Taylor and Francis Journals, vol. 40(17), pages 2259-2270.
  3. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
  4. Jerome Creel & Francesco Saraceno, 2008. "Automatic Stabilisation, Discretionary Policy and the Stability Pact," Documents de Travail de l'OFCE 2008-15, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Paola Monperrus-Veroni & Francesco Saraceno, 2005. "Reform of the Stability and Growth Pact: Reducing or Increasing the Nuisance?," Documents de Travail de l'OFCE 2005-01, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Glenn D. Rudebusch & Jeffrey C. Fuhrer, 2002. "Estimating the Euler equation for output," Working Papers in Applied Economic Theory 2002-12, Federal Reserve Bank of San Francisco.
  7. Jérôme Creel & Francesco Saraceno, 2010. "European fiscal rules after the crisis," Journal of Innovation Economics, De Boeck Université, vol. 0(2), pages 95-122.
  8. Sebastian Hauptmeier & Jesus Sanchez Fuentes & Ludger Schuknecht, 2010. "Towards expenditure rules and fiscal sanity in the euro area," Working Paper Series 1266, European Central Bank.
  9. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
  10. Marco Buti & Gabriele Giudice, 2002. "Maastricht's Fiscal Rules at Ten: An Assessment," Journal of Common Market Studies, Wiley Blackwell, vol. 40(5), pages 823-848, December.
  11. George Kopits & Steven A. Symansky, 1998. "Fiscal Policy Rules," IMF Occasional Papers 162, International Monetary Fund.
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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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