Safety Margins in EU Budgetary Surveillance: An Assessment

26 Pages Posted: 14 Feb 2012

See all articles by Lorenzo Codogno

Lorenzo Codogno

London School of Economics

Francesco Nucci

University of Rome I

Date Written: March 29, 2007

Abstract

This paper deals with alternative approaches for deriving adequate budgetary safety margins. We highlight some critical features of the existing EU Commission’s methodology and propose an alternative method for assessing the minimal benchmark, i.e. the value of the deficit-to-GDP ratio that ensures compliance with the required safety margins. A number of empirical arguments lend support to this measurement approach, although our estimates of minimal benchmarks do not diverge extensively from those derived through the current methodology. We also provide estimates of safety margins by using a complementary approach based on stochastic simulations of a macroeconomic model. The findings are qualitatively very similar to those obtained with the other method. Moreover, we lend empirical support to the view that a fiscal structure with lower budget sensitivity to cyclical fluctuations is conducive to less ambitious safety margins.

Keywords: budgetary safety margin, minimal benchmark, cyclically-adjusted balance

JEL Classification: E62, H62

Suggested Citation

Codogno, Lorenzo and Nucci, Francesco, Safety Margins in EU Budgetary Surveillance: An Assessment (March 29, 2007). Available at SSRN: https://ssrn.com/abstract=2004292 or http://dx.doi.org/10.2139/ssrn.2004292

Lorenzo Codogno (Contact Author)

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0) 20 8295 2291 (Phone)

Francesco Nucci

University of Rome I ( email )

Piazzale Aldo Moro
Rome, 00185
Italy
+39 06 4991 0847 (Phone)
+39 06 445 3246 (Fax)

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