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Reform of the Stability and Growth Pact: Reducing or Increasing the Nuisance?

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Abstract

This paper aims at providing a quantitative assessment of different proposals for reforming the Stability and Growth Pact by extending a counterfactual experiment performed in Eichengreen and Wyplosz (1998). Using estimated coefficients from a reduced form model, we simulate the path of the output gap for the largest Euro zone countries (France, Germany, Italy) after imposing limits to structural deficit according to different fiscal rules (structural deficit rules, golden rules and rules that incorporate the stock of debt). For each of these countries we can rank the different reform proposals in terms of output loss over the period considered. Our analysis has the merit of using a uniform method and hence allow a comparison across countries and across rules. The main results of the experiment, which emerge robustly, are (a), that the golden rule would be the most beneficial both using individual country's criteria and global criteria; and (b) that the status quo, the Maastricht rule, is less restrictive than many currently debated alternatives.

Suggested Citation

  • 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).
  • Handle: RePEc:fce:doctra:0501
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    1. Jordi Galí & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
    2. 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.
    3. Buti, Marco & Eijffinger, Sylvester C.W. & Franco, Daniele, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Seminarios y Conferencias 6567, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    4. André Sapir & Marco Buti, 2002. "EMU and economic policy in Europe: the challenge of the early years," ULB Institutional Repository 2013/8072, ULB -- Universite Libre de Bruxelles.
    5. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
    6. 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.
    7. Francesco Saraceno & Paola Monperrus-Veroni, 2004. "A Simple Proposal for a "Debt-Sensitive Stability Pact"," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 73(3), pages 471-480.
    8. Jérôme Creel, 2003. "Ranking Fiscal Policy Rules: the Golden Rule of Public Finance vs. the Stability and Growth Pact," Sciences Po publications 2003-04, Sciences Po.
    9. Lars Calmfors & Giancarlo Corsetti, 2003. "How to Reform Europe’s Fiscal Policy Framework," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(1), pages 109-116, January.
    10. Buti, Marco, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34908, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    11. Willem H. Buiter & Clemens Grafe, 2004. "Patching up the Pact," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(1), pages 67-102, March.
    12. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 65-113, April.
    13. Marco Buti & Gabriele Giudice, 2002. "Maastricht's Fiscal Rules at Ten: An Assessment," Journal of Common Market Studies, Wiley Blackwell, vol. 40(5), pages 823-848, December.
    14. George Kopits & Steven A. Symansky, 1998. "Fiscal Policy Rules," IMF Occasional Papers 162, International Monetary Fund.
    15. Marco Buti & André Sapir, 2002. "EMU in the Early Years: Differences and Credibility," Chapters,in: EMU and Economic Policy in Europe, chapter 1 Edward Elgar Publishing.
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    Cited by:

    1. Jérôme Creel & Paul Hubert & Francesco Saraceno, 2014. "French Public Finances at Risk?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 1-19, Februar.
    2. Jérôme Creel & Francesco Saraceno, 2008. "Automatic Stabilisation, Discretionary Policy and the Stability Pact," Sciences Po publications 2008-15, Sciences Po.
    3. Jerome Creel & Paul Hubert & Francesco Saraceno, 2012. "An assessment of Stability and Growth Pact Reform Proposals in a Small-Scale Macro Framework," Documents de Travail de l'OFCE 2012-04, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Creel, Jérôme & Hubert, Paul & Saraceno, Francesco, 2012. "The European Fiscal Compact: A Counterfactual Assessment," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 27, pages 537-563.
    5. Creel, Jérôme & Hubert, Paul & Saraceno, Francesco, 2013. "An assessment of the Stability and Growth Pact reform in a small-scale macro-framework," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1567-1580.

    More about this item

    Keywords

    Stability Pact; Golden Rule; European Union; Institutional Reform; Fiscal Rules;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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