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Deficit Targeting Strategies: Fiscal Consolidation and the Probability Distribution of Deficits under the Stability Pact

  • A.J. Hughes Hallett
  • Peter McAdam

Using stochastic simulations, this article analyses the probability distribution of a country's deficit ratio under fixed exchange rates and a variety of monetary and fiscal policy rules. The purpose is to show how the probability of an 'excessive deficit', defined by Europe's Stability Pact as a deficit to GDP ratio above 3 per cent, varies with different deficit targets and policy rules. Using a macro model, we find that when subject to historically consistent shocks, these fiscal ratios typically have a wide distribution, with fat tails and significantly longer tails on the upper side. That means fiscal targets may have to be country-specific and conservative, and that fiscal policy has to be forward-looking to keep the probability of excessive deficits below acceptable limits. Copyright Blackwell Publishing Ltd 2003.

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Article provided by Wiley Blackwell in its journal Journal of Common Market Studies.

Volume (Year): 41 (2003)
Issue (Month): 3 (06)
Pages: 421-444

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Handle: RePEc:bla:jcmkts:v:41:y:2003:i:3:p:421-444
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