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An assessment of stability and growth pact reform proposals in a small-scale macro framework

Author

Listed:
  • Jérôme Creel

    () (OFCE - OFCE - Sciences Po)

  • Paul Hubert

    () (OFCE - OFCE - Sciences Po)

  • Francesco Saraceno

    () (OFCE - OFCE - Sciences Po)

Abstract

This paper contributes to the debate on fiscal governance for the European Monetary Union, assessing the different fiscal rules currently discussed. We simulate a small scale macroeconomic model with forward looking agents, augmented with a public finances block. We account for both the positive (output stabilization) and negative (via risk premia) effects of debt and deficit. By the appropriate choice of the exogenous fiscal variables, in the fiscal block, we replicate the working of the rules embedded in the socalled "fiscal compact": a balanced budget rule (the "new golden rule"), and the debt reduction rule (to reach 60% of GDP in 20 years). We compare these rules with the Maastricht 3% deficit limit (status quo), and with an "investment" rule leaving room for public investment. We evaluate the performance in terms of output loss during a fiscal consolidation, as well as following demand and supply shocks in steady state. All rules guarantee long run sustainability. The investment rule emerges robustly as the one guaranteeing the lower output loss, followed by the status quo. The "fiscal compact" rules appear to be recessionary.

Suggested Citation

  • Jérôme Creel & Paul Hubert & Francesco Saraceno, 2012. "An assessment of stability and growth pact reform proposals in a small-scale macro framework," Working Papers hal-01070286, HAL.
  • Handle: RePEc:hal:wpaper:hal-01070286
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-01070286
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    References listed on IDEAS

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    1. Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March.
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    6. Jérôme Creel & Francesco Saraceno, 2010. "European fiscal rules after the crisis," Journal of Innovation Economics, De Boeck Université, vol. 0(2), pages 95-122.
    7. Hauptmeier, Sebastian & Sanchez-Fuentes, A. Jesus & Schuknecht, Ludger, 2011. "Towards expenditure rules and fiscal sanity in the euro area," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 597-617, July.
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    Cited by:

    1. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudré & Danielle Schweisguth & Xavier Timbeau, 2014. "Is There an Alternative Strategy for Reducing Public Debt by 2032?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 39-57, Februar.
    2. S. Menguy, 2014. "Which is the optimal fiscal rule in a monetary union? Targeting the structural, the global budgetary deficit, or the public debt?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-21, December.
    3. Reicher, Claire A., 2014. "Fiscal targeting rules and macroeconomic stability under distortionary taxation," Kiel Working Papers 1968, Kiel Institute for the World Economy (IfW).
    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.

    More about this item

    Keywords

    Fiscal Rules; Small scale Macroeconomic Models; golden rule; fiscal consolidation; EMU economic governance; fiscal compact; Dynare;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • 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
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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