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A Simple Proposal for a Debt Related Fiscal Rule

Listed author(s):
  • Francesco Saraceno
  • Paola Veroni

    (Observatoire français des conjonctures économiques)

The main rationale for fiscal policy rules is the concern for long-term sustainability of public finances, that in a monetary union may affect the other members. Among many other criticisms, the Stability and Growth Pact (SGP) has been seen as contradictory or incomplete because it focuses on deficit rather than debt, the main indicator of public finances’ soundness. Furthermore, the few references to debt that were present in the treaties and related regulations are essentially ignored in actual practices. Some of the reform proposals that came out lately have addressed the issue and tried to embed a debt criterion in the Pact. We review these proposals and put forward our own proposed modification: the deficit ratio countries should target is weighted by their relative debt. With respect to the other proposals taking into account debt, our own has the advantages of simplicity, symmetry, and low arbitrariness. To make it politically acceptable to high debt countries, nevertheless, could require to set the targets, at least initially, at level higher than the Maastricht criteria.

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File URL: http://spire.sciencespo.fr/hdl:/2441/2524/resources/v-04-3-12.381950.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/2524.

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Date of creation: Nov 2004
Publication status: Published in Vierteljahrshefte zur Wirtschaftsforschung , 2004, vol. 73, pp.471-480
Handle: RePEc:spo:wpmain:info:hdl:2441/2524
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  1. 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).
  2. 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.
  3. 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).
  4. George Kopits & Steven A. Symansky, 1998. "Fiscal Policy Rules," IMF Occasional Papers 162, International Monetary Fund.
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