'Close to Balance or in Surplus': A Methodology to Calculate Fiscal Benchmarks
Fiscal Sustainability Conference, p. 95, 2000
40 Pages Posted: 16 Jul 2012
Date Written: January 20, 2000
Paul Hiebert and Massimo Rostagno explore the analytical links between EMU fiscal rules and the theory of fiscal sustainability with a focus on the transition to the equilibrium debt to GDP ratios implied by such rules. The authors argue that such a transition cannot be satisfactorily managed by simply prescribing strict adherence to the safety margins computed by the European Commission for the cyclically adjusted budgets of EMU member countries. This strategy may induce distortions in the way fiscal quantities respond to economic developments. They also point out that indicators like the tax-gap, while useful in signalling a prospective imbalance, do not translate automatically into policy prescriptions. Hiebert and Rostagno therefore explore the properties of a policy rule whereby fiscal variables are adjusted according to the distance between the current and the targeted fiscal position and find that this allows a flexible pattern of fiscal response to both cyclical and structural changes.
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