‘Close‐to‐Balance or in Surplus’: A Policy‐Maker's Guide to the Implementation of the Stability and Growth Pact

Artis, Michael J.; Buti, Marco

doi:10.1111/1468-5965.00254

Cited by 137 publications

(78 citation statements)

References 16 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Within the AS regime, government spending increases (relatively) with negative output fluctuations (and vice versa), which is how automatic stabilization has often been modelled previously (see e.g. Taylor, 2000;Artis and Buti, 2000;or Buti et al, 2001). In order to make this rule comparable to the DB, we assume that, in the steady-state, both rules are tied to steady-state revenues (which implies thatΨ P is regarded as a fixed constant in the AS regime).…”

Section: The Debt Brake (Db) and Additional Rule-based Stabilization mentioning

confidence: 60%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

View full text Add to dashboard Cite

Abstract:In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.Keywords: fiscal policy, debt brake, welfare, dsge.JEL classification: E 32, G 61, E 62. Non-technical summaryThe possibilities and limits of fiscal policy regarding economic stabilization have moved center stage lately, certainly also prompted by the current economic downturn. In this context, it is continuously stressed that it is necessary to assure sustainability of public finances and the confidence therein. This can be achieved not least by reliable consolidation after the crisis, and -at least in normal times -by rule-based budget requirements. For example, the International Monetary Fund recently identified a possible positive role for rule-based fiscal policy emphasizing that is must be sustainable and reliable if countercyclical fiscal policy is to unfold its desired effects. While in the 1970s, there seemed to be confidence in somewhat active discretionary fiscal policy, further developments have shown that rule-based actions are needed because of reasons revealed in the political economic literature. This insight is also the basis for the fiscal framework of the European (monetary) union.The focus of the present paper is on the analysis of a rule-based fiscal policy, in particular, the "debt brake", which is expected to be introduced in Germany soon and has already been implemented in Switzerland. The discussion about the introduction of the debt brake has to be seen in the context of European fiscal rules, namely the European Stability and Growth Pact (SGP). As a rule, the SGP demands roughly balanced budgets in structural terms, while letting the automatic stabilizers take effect. The corrective arm of the pact is called on particularly if the 3% deficit ceiling is violated. The 60% debt ceiling also plays a role. As German national budgetary rules have not been consistent with the European framework, and they were largely assessed as being inappropriate with a view to limiting the increase in public debt, this was the hour of birth of the "Förderalismuskommission II" (federalism reform commission), which recently agreed on a proposal for the DB.Similar to the SGP, the debt brake demands (almost) structurally balanced budgets and, thus, ties cyclically adjusted government spending (including interest on outstanding debt) to cyclically adjusted trend revenues raised by the government and, therefore, acts as an automatic stabilizer since the government finances some of its expenditures from deficits in "bad times" while accumulating surpluses...

show abstract

Section: The Debt Brake (Db) and Additional Rule-based Stabilization mentioning

confidence: 60%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

View full text Add to dashboard Cite

show abstract

“…We are thus sceptical of the benefits of the SGP for the purpose of stabilisation (Artis et al 2000, Brunila 2002, Wyplosz 2002. On balance, the expenditure target leads to more stabilisation than the deficit target.…”

Section: Resultsmentioning

confidence: 99%

Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union

Brück

Zwiener

2006

Journal of Policy Modeling

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Terms of use: Documents in AbstractWe analyse the effectiveness of fiscal policy rules for business cycle stabilisation in a monetary union using a quarterly macro-econometric model of Germany. The simulations compare a deficit target and an expenditure target under a range of supply, demand and fiscal shocks. Their effects are evaluated by their impact on prices and output. The analysis demonstrates that in general the deficit target of the stability pact leads to less stabilisation than an expenditure target. The results suggest that the deficit rule of the stability pact should be replaced with an expenditure rule augmented by medium-term debt targets.

show abstract

“…These findings shed doubts on early assessments on the substantial safety margin guaranteed by the 3% deficit ceiling (e.g. Buti and Sapir (1998), Artis and Buti (2000)). …”

Section: Us T ŷmentioning

confidence: 93%

“…al. (1995), Artis and Buti (2000), van den Noord (2000), Brunila et al (2002)). Italy is also at variance with received wisdom which wants taxation as the more elastic stabilizer.…”

Section: Us T ŷmentioning

confidence: 98%

See 1 more Smart Citation

Fiscal and Monetary Policy, Unfortunate Events, and the SGP Arithmetics Evidence from a Growth-Gaps Model

2005

View full text Add to dashboard Cite

The recent revision (March 2005) of the Stability and Growth Pact (SGP) has confirmed the 3% deficit/GDP ratio as the pillar of the excessive deficits procedure envisaged by the Maastricht Treaty for member countries of the EMU. Since the deficit/GDP ceiling is still in place, research on its implications for fiscal discipline and macroeconomic stabilization has to be pushed further. We argue that the agenda largely involves empirical matters. In particular, this paper presents an econometric estimate and simulations of a macroeconomic model of Italy and Germany aimed at addressing three issues. First, monetary and fiscal rules intercations are explictly modelled and examined in dynamic setting. Second, consistently with common perception and the new formulation of the SGP, the business cycle and the responses of policy variables are cast in terms of growth gaps, not gaps in levels, with respect to potential. Third, budgetary components (primary expenditure and total tax revenue) are examined as separate fiscal rules, which allows us to track the reaction of the fiscal stance to growth shocks more precisely, to point out several pitfalls in current measures of fiscal ratios to GDP, and suggest more accurate assessment of fiscal stances. JEL Classification: E0; E6

show abstract

‘Close‐to‐Balance or in Surplus’: A Policy‐Maker's Guide to the Implementation of the Stability and Growth Pact

Cited by 137 publications

References 16 publications

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union

Fiscal and Monetary Policy, Unfortunate Events, and the SGP Arithmetics Evidence from a Growth-Gaps Model

Contact Info

Product

Resources

About