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A Simple Proposal for a 'Debt-Sensitive Stability Pact'

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  • Francesco Saraceno

    (Observatoire Francais des Conjonctures Economiques)

  • Paola Monperrus-Veroni

    (Observatoire Francais des Conjonctures Economiques)

Abstract

The main rationale for fiscal policy rules is the concern for long term sustainability of public finances, that in a monetary union may affect the other members. Among many other criticisms, the Stability and Growth Pact (SGP) has been seen as contradictory or incomplete because it focuses on deficit rather than debt, the main indicator of public finances' soundness. Furthermore the few references to debt that were present in the treaties are essentially ignored in actual practices. Some of the reform proposals that came out lately have addressed the issue, and tried to embed a debt criterion in the Pact. We review these proposals, and put forward our own proposed modification: the deficit ratio countries should target is weighed by their relative debt. With respect to the other proposals taking into account debt, our own has the advantages of simplicity, symmetry, and low arbitrariness. To make it politically acceptable to high debt countries, nevertheless, could require to set the targets, at least initially, at level higher than the Maastricht criteria

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File URL: http://128.118.178.162/eps/mac/papers/0406/0406001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0406001.

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Length: 11 pages
Date of creation: 02 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0406001

Note: Type of Document - pdf; pages: 11
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Web page: http://128.118.178.162

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Keywords: Stability Pact; Fiscal policy; Debt Sustainability;

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References

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  1. Buti, Marco & Eijffinger, Sylvester C W & Franco, Daniele, 2003. "Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?," CEPR Discussion Papers 3692, C.E.P.R. Discussion Papers.
  2. Peter S. Heller & Sanjeev Gupta, 2002. "More Aid—Making It Work for the Poor," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 3(4), pages 131-146, October.
  3. Corsetti, Giancarlo & Devereux, Michael P. & Guiso, Luigi & Hassler, John & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2010. "The European economy," Munich Reprints in Economics 20104, University of Munich, Department of Economics.
  4. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
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Cited by:
  1. Menguy, Séverine, 2008. "A dynamic rule applied to the threshold imposed on the European budgetary deficits," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1093-1105.
  2. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers.
  3. 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).

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