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The Prudence Principle: A New Framework for Eurozone Fiscal Policy

Author

Listed:
  • Eric Lonergan

    (M&G Investments)

  • Mark Blyth

    (Brown University)

Abstract

This working paper is an intervention into the on-going debate over the future of fiscal rules in the European Union. It argues that rather than writing down rules and expecting the world to conform to them, a better approach is to make the concept of ‘fiscal space’ operational by tying it explicitly to rates of interest on government debt. This permits huge flexibility in the size of the deficit, in the debt/GDP ratio, leaves inflation targeting to the central bank, and guarantees debt sustainability. It would also provide clarity to the public that the government is honoring its word.

Suggested Citation

  • Eric Lonergan & Mark Blyth, 2021. "The Prudence Principle: A New Framework for Eurozone Fiscal Policy," Working Papers 6, Forum New Economy.
    • Handle: RePEc:agz:wpaper:2106
    as

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    File URL: https://newforum.org/wp-content/uploads/2021/12/FNE-WP06-2021.pdf
    File Function: First version, 2021
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    References listed on IDEAS

    as
    1. Gabor, Daniela, 2021. "Revolution Without Revolutionaries: Interrogating the Return of Monetary Financing," SocArXiv ja9bk, Center for Open Science.
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    3. Alan S. Blinder, 1982. "The Anatomy of Double-Digit Inflation in the 1970s," NBER Chapters, in: Inflation: Causes and Effects, pages 261-282, National Bureau of Economic Research, Inc.
    4. Brett Fiebiger & Scott Fullwiler & Stephanie Kelton & L. Randall Wray, 2012. "Modern Monetary Theory: A Debate," Working Papers wp279, Political Economy Research Institute, University of Massachusetts at Amherst.
    5. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    debt; fiscal policy; monetary policy; interest rates; functional finance;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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