Fiscal Policy Rules and the Sustainability of Public Debt in Europe
In this paper, the sustainability of public debt is interpreted as the result of the interaction of fiscal policy with the economic environment, and not as a statistical concept as in most of the recent literature. If debt must not explode over time, policy makers have to respond to the changing conditions in the macroeconomic environment. This paper defines the conditions which will ensure compliance of fiscal policy with the intertemporal budget constraint in the context of Europe’s fiscal policy rules. The empirical part of the paper reveals that European public debt is sustainable in this respect, but questions regarding liquidity remain.
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