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The Risks of Adopting the Bond Yield as the Anchor for the EU Fiscal Framework

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  • Andersson, Fredrik N. G.

    (Department of Economics, Lund University)

  • Jonung, Lars

    (Department of Economics, Lund University)

Abstract

The EU’s fiscal rules, set out in the Maastricht Treaty of 1993 and the Stability and Growth Pact of 1997, are anchored to GDP. The debt ceiling and the deficit threshold are set to 60 percent and 3 percent of GDP, respectively. Recently, prominent economists and policymakers, have argued that that the debt ceiling should be raised due to falling bond yields. By extension, this argument suggests a shift from GDP anchoring to bond yield anchoring of the EU fiscal framework. We discuss the risks of basing the fiscal rules on the bond yield rather than on the GDP. While such a change would provide short-run relief to highly indebted EU member states, it implies high long-run risks to fiscal sustainability should bond yields rise in the future. We conclude that GDP serves as a better anchor for the EU fiscal framework than the bond rate under present circumstances.

Suggested Citation

  • Andersson, Fredrik N. G. & Jonung, Lars, 2022. "The Risks of Adopting the Bond Yield as the Anchor for the EU Fiscal Framework," Working Papers 2022:1, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2022_001
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Fiscal framework; European Union; ECB; Stability and Growth Pact; secular stagnation; modern monetary theory; government debt; fiscal policy;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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