Numerical fiscal rules for economic unions: The role of sovereign spreads

We study gains from introducing common numerical fiscal rules in a “Union” of model economies facing sovereign default risk. We show that among economies in the Union, there is significant disagreement about the common debt limit the Union should implement: the limit preferred by some economies can generate welfare losses in other economies. In contrast, a common sovereign spread limit produces welfare gains across economies in the Union. This result also implies that a spread limit is a more robust rule than a debt limit for a single economy that faces uncertainty about its key characteristics.