Nonlinearity, Endogeneity, and Interaction: Implications for European Reform of Budgetary Rules

EU fiscal rules have been suspended until 2024. European policymakers are considering whether to reinstate the existing fiscal rules or to define a new framework . Member States must have enough fiscal space . But the sustainability of public debt must be safeguarded. We use a nonlinear dynamic mode...

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Bibliographic Details
Published in:Italian economic journal 2024-07, Vol.10 (2), p.519-550
Main Authors: Bellocchi, Alessandro, Travaglini, Giuseppe
Format: Article
Language:English
Subjects:
Economics
Economics and Finance
European Integration
Research Paper
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Summary:EU fiscal rules have been suspended until 2024. European policymakers are considering whether to reinstate the existing fiscal rules or to define a new framework . Member States must have enough fiscal space . But the sustainability of public debt must be safeguarded. We use a nonlinear dynamic model to test if a primary balance adjustment rule can preserve debt sustainability in the presence of interactions between fiscal policy, economic growth, and interest rates. We find that a dynamic adjustment rule to changes in debt service can reduce the equilibrium debt ratio, even stabilizing the associated risk premium .
ISSN:2199-322X
2199-3238
DOI:10.1007/s40797-023-00253-3