Debt Rule Design in Theory and Practice: The SGP's Debt Benchmark Revisited

41 Pages Posted: 9 Mar 2020

See all articles by Sebastian Hauptmeier

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Christophe Kamps

European Central Bank (ECB)

Date Written: March, 2020

Abstract

This paper is linked to two debates on fiscal policies: first, the implications of low interest-growth differentials for debt sustainability and, second, the reform of the EU fiscal governance framework. In both debates the choice of government debt anchor and the speed of adjustment take centre stage. The Stability and Growth Pact's debt rule appears predestined to fulfil the role of debt anchor. However, our analysis shows that its existing design gives rise to a pro-cyclical bias that has hampered its implementation in the low-growth low-inflation environment. We propose two parametric changes to better balance the objectives of macroeconomic stabilisation and debt sustainability: first, accounting for persistent deviations of inflation from the central bank's objective; and, second, a reduced speed of adjustment. Putting a reformed debt rule at the centre of the EU fiscal governance framework would allow reducing the latter's complexity without the need to revise the EU Treaties.

Keywords: fiscal governance, fiscal policy, fiscal rules, interest rates, public debt sustainability

JEL Classification: E62, F42, H61, H62, H63, H87

Suggested Citation

Hauptmeier, Sebastian and Kamps, Christophe, Debt Rule Design in Theory and Practice: The SGP's Debt Benchmark Revisited (March, 2020). ECB Working Paper No. 2379, Available at SSRN: https://ssrn.com/abstract=3548577

Sebastian Hauptmeier (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Christophe Kamps

European Central Bank (ECB) ( email )

Sonnemannstrasse 20
D-60314 Frankfurt am Main
Germany

HOME PAGE: http://https://www.ecb.europa.eu/pub/research/authors/profiles/christophe-kamps.en.html

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
24
Abstract Views
143
PlumX Metrics