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From debt arithmetic to fiscal sustainability and fiscal rules: taking stock and policy lessons

Author

Listed:
  • George Economides
  • Giota Koliousi
  • Natasha Miaouli
  • Apostolis Philippopoulos

Abstract

We start by clarifying the role of the interest rate-growth rate differential in debt arithmetic with numerical examples for the Greek economy. In turn, building upon this popular approach to fiscal sustainability, which is based on the intertemporal government budget constraint only, we make a number of methodological points that question the quantitative usefulness of standard calculations. Among other things, we argue that a structural approach is needed and this reveals the necessity of fiscal rules according to which fiscal instruments systematically react to public debt imbalances. This naturally enables us to evaluate the EU's fiscal rules and to suggest simple and implementable alternatives. Throughout, we confront our arguments with data from the Euro Area.

Suggested Citation

  • George Economides & Giota Koliousi & Natasha Miaouli & Apostolis Philippopoulos, 2024. "From debt arithmetic to fiscal sustainability and fiscal rules: taking stock and policy lessons," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 194, Hellenic Observatory, LSE.
    • Handle: RePEc:hel:greese:194
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    File URL: https://www.lse.ac.uk/Hellenic-Observatory/Assets/Documents/Publications/GreeSE-Papers/GreeSE-No194.pdf
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    References listed on IDEAS

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    1. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    2. Olivier J Blanchard & Mitali Das, 2017. "A New Index of External Debt Sustainability," Working Paper Series WP17-13, Peterson Institute for International Economics.
    3. George Economides & Apostolis Philippopoulos, 2023. "Fiscal Sustainability: Interest Rates, Growth and Debt-based Policy Rules," EconPol Forum, CESifo, vol. 24(04), pages 11-15, July.
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    5. Benigno, Pierpaolo & Woodford, Michael, 2006. "Optimal taxation in an RBC model: A linear-quadratic approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1445-1489.
    6. Florin Bilbiie & Tommaso Monacelli & Roberto Perotti, 2021. "Fiscal Policy in Europe: Controversies over Rules, Mutual Insurance, and Centralization," Journal of Economic Perspectives, American Economic Association, vol. 35(2), pages 77-100, Spring.
    7. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    8. Vasiliki Dimakopoulou & George Economides & Apostolis Philippopoulos & Vanghelis Vassilatos, 2023. "Can Central Banks Do the Unpleasant Job That Governments Should Do?," CESifo Working Paper Series 10603, CESifo.
    9. George Economides & Dimitris Papageorgiou & Apostolis Philippopoulos, 2021. "Austerity, Assistance and Institutions: Lessons from the Greek Sovereign Debt Crisis," Open Economies Review, Springer, vol. 32(3), pages 435-478, July.
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    12. Barry Eichengreen, 2022. "The Debate Over US Public Debt: Overburdened or Overwrought?," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 23(01), pages 3-8, January.
    13. Economides George & Philippopoulos Apostolis & Vassilatos Vanghelis, 2022. "The Impact of the Lockdown on the Greek Economy and the Role of the Recovery Fund," The B.E. Journal of Macroeconomics, De Gruyter, vol. 22(1), pages 307-361, January.
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    Cited by:

    1. Emmanuel C Mamatzakis, 2024. "High Greek Bank Net Interest Margins, Recapitalisations and Competition," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 199, Hellenic Observatory, LSE.
    2. Spyros Economides, 2024. "Konstantinos Karamanlis and Leadership in Foreign Policy," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 195, Hellenic Observatory, LSE.

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    More about this item

    Keywords

    Fiscal policy; public debt dynamics; Euro Area;
    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
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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