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Nonlinearity, Endogeneity, and Interaction: Implications for European Reform of Budgetary Rules

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  • Alessandro Bellocchi

    (University of Urbino Carlo Bo)

  • Giuseppe Travaglini

    (University of Urbino Carlo Bo)

Abstract

EU fiscal rules have been suspended until 2024. European policymakers are considering whether to reinstate the existing fiscal rules or to define a new framework. Member States must have enough fiscal space. But the sustainability of public debt must be safeguarded. We use a nonlinear dynamic model to test if a primary balance adjustment rule can preserve debt sustainability in the presence of interactions between fiscal policy, economic growth, and interest rates. We find that a dynamic adjustment rule to changes in debt service can reduce the equilibrium debt ratio, even stabilizing the associated risk premium.

Suggested Citation

  • Alessandro Bellocchi & Giuseppe Travaglini, 2024. "Nonlinearity, Endogeneity, and Interaction: Implications for European Reform of Budgetary Rules," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 10(2), pages 519-550, July.
    • Handle: RePEc:spr:italej:v:10:y:2024:i:2:d:10.1007_s40797-023-00253-3
    DOI: 10.1007/s40797-023-00253-3
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    More about this item

    Keywords

    Public debt sustainability; Nonlinearity; Endogeneity; Fiscal policy;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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