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Choosing the European fiscal rule

Author

Listed:
  • Ginters Bušs

    (Research Division, Monetary Policy Department, Latvijas Banka, Riga, Latvia)

  • Patrick Grüning

    (Research Division, Monetary Policy Department, Latvijas Banka, Riga, Latvia)

  • Oļegs Tkačevs

    (Research Division, Monetary Policy Department, Latvijas Banka, Riga, Latvia)

Abstract

In order to quantitatively assess the potential effects from the ongoing transformation of the fiscal framework of the European Union, we evaluate the economic and public finance stabilization properties of two benchmark fiscal rules using a New Keynesian small open economy model. If these fiscal rules are implemented one at a time, having just an expenditure growth rule tends to yield more stable macroeconomic outcomes but more volatile public finances, as compared to having only a structural balance rule. Much of the quantitative differences in relative volatilities can be accounted for by using a modified public expenditure definition in the expenditure growth rule, in particular the removal of debt service payments. The expenditure growth rule with a strong-enough debt anchor strikes the balance between the short-term macroeconomic stability and the medium-term public debt convergence. There is a welfare gain for households from having only an expenditure growth rule.

Suggested Citation

  • Ginters Bušs & Patrick Grüning & Oļegs Tkačevs, 2024. "Choosing the European fiscal rule," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 24(1), pages 116-144.
  • Handle: RePEc:bic:journl:v:24:y:2024:i:1:p:116-144
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    File URL: https://www.tandfonline.com/doi/epdf/10.1080/1406099X.2024.2340402
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    More about this item

    Keywords

    Fiscal policy; DSGE; small open economy; fiscal-monetary policy interaction;
    All these keywords.

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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