Debt rule design in theory and practice - the SGP’s debt benchmark revisited Sebastian Hauptmeier Christophe Kamps European Central Bank ECFIN workshop ”Fiscal rules in Europe”, Brussels, 28 January 2020 The views expressed are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem.
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Debt rule design in theory and practice - the SGP's debt ... · a QFD a QFD primary balance ratio RI*'3 EDVHOLQH a 6*3 a QFD ... Sebastian Hauptmeier, Christophe Kamps 0.25cm European
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Debt rule design in theory and practice -the SGP’s debt benchmark revisited
Sebastian Hauptmeier Christophe Kamps
European Central Bank
ECFIN workshop ”Fiscal rules in Europe”, Brussels, 28 January 2020
The views expressed are those of the authors and do not necessarily reflect those of the ECB or the
Eurosystem.
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Context (I): SGP debt rule - status quo
I SGP debt rule introduced in 2011 as part of Six-Packreform to operationalise the Treaty debt criterion
I The implementation for high debt countries has beendifficult in the ”lowflation” environment:
I continued ”prima facie” breaches of debt criterion (IT, BE) ...
I ... but relevant factors taken into account in Art. 126(3)reports to avoid opening of EDPs (incl. low growth/inflation)
I ECB (2016): adjustment requirements under the debt rulereact sensitively to changes in inflation and growth
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Context (II): debt sustainability implications of lowinterest-growth differentials
I Blanchard (2019): ”public debt may have no fiscal cost” intimes of negative interest-growth differentials
I Blanchard et al. (2019): EU fiscal framework needsrebalancing from focus on debt externalities to demandexternalities (given more important role of fiscal policies whenECB at the ELB)
I Economic rationale for reducing public debt to prudentlevels when markets perceive government bonds as risky (e.g.,Lorenzoni and Werning (2019)):
I Sovereign risk considerations important when designingoptimal debt policies in EMU
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Context (III): SGP reform debate
I upcoming ’Six-pack’ and ’Two-pack’ review opportunity todiscuss effectiveness of SGP framework
I broad consensus on simplification: single operationalindicator and debt anchor (EC, EFB, IMF, 14 FR/DEeconomists)
I SGP’s debt rule predestined to fulfil the role of debtanchor and form core of a reformed EU fiscal governanceframework
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This paper
I Analysis suggests that
I the existing design of the debt rule gives rise to a pro-cyclicalbias ...
I ... which has hampered its implementation in the low-growthlow-inflation environment.
I We propose two parametric changes to the debt rule tobetter balance the objectives of macroeconomic stabilisationand debt sustainability:
I accounting for persistent deviations of inflation from thecentral bank’s objective
I Application of SGP debt rule based on dncat would imply:
I treatment of (y realt − ypot
t ) and (ydef − ydef 2%) as cyclicalfactors
I enhanced smoothing of adjustment requirements over the cycle(compared to existing SGP method, i.e. real adjustment)
I more fiscal space in times of below-target inflation
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Simulations (I): Data / assumptions
I Data: European Commission AMECO database
I Fiscal / macroeconomic projections: Autumn 2019 ECforecast until 2021; as of 2022: 2018 Fiscal SustainabilityReport / T+10 assumptions from EPC Output Gaps WorkingGroup
I Fiscal adjustment scenarios:
I aggregate fiscal multiplier of 0.7 (0.5 real GDP growth, 0.2GDP deflator growth)
I Debt targets according to
d0+N = (1− α)N(dt−1 − d∗) + d∗
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Simulations (II): Italy - actual versus cycl. adj. debtdevelopments