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GDP, not the Bond Yield, should Remain the Anchor of the EU Fiscal Framework

Andersson, Fredrik N G LU and Jonung, Lars LU (2022) In In Focus
Abstract
Declining bond yields and rising public debts have caused many economists to suggest raising the debt ceiling in the EU’s Stability and Growth Pact. Implicitly, they argue for replacing GDP as the anchor with the bond yield. We discuss the risks of such a shift. While such a change would provide short-term relief to highly indebted EU member states, it is based on the expectation that bond yields will remain low for the foreseeable future. The historical record, however, suggests that prolonged periods of low real bond yields are eventually replaced by periods of high real bond yields. And this phase may have already started. From a long-term sustainability perspective, we conclude that GDP serves as a better long-term anchor for the EU... (More)
Declining bond yields and rising public debts have caused many economists to suggest raising the debt ceiling in the EU’s Stability and Growth Pact. Implicitly, they argue for replacing GDP as the anchor with the bond yield. We discuss the risks of such a shift. While such a change would provide short-term relief to highly indebted EU member states, it is based on the expectation that bond yields will remain low for the foreseeable future. The historical record, however, suggests that prolonged periods of low real bond yields are eventually replaced by periods of high real bond yields. And this phase may have already started. From a long-term sustainability perspective, we conclude that GDP serves as a better long-term anchor for the EU fiscal framework than the bond rate. (Less)
Abstract (Swedish)
Declining bond yields and rising public debts have caused many economists to suggest raising the debt ceiling in the EU’s Stability and Growth Pact. Implicitly, they argue for replacing GDP as the anchor with the bond yield. We discuss the risks of such a shift. While such a change would provide shortterm relief to highly indebted EU member states, it is based on the expectation that bond yields will
emain low for the foreseeable future. The historical record, however, suggests that prolonged periods of low real bond yields are eventually replaced by periods of high real bond yields. And this phase may have already started. From a long-term sustainability perspective, we conclude that GDP serves as a better long-term nchor for the... (More)
Declining bond yields and rising public debts have caused many economists to suggest raising the debt ceiling in the EU’s Stability and Growth Pact. Implicitly, they argue for replacing GDP as the anchor with the bond yield. We discuss the risks of such a shift. While such a change would provide shortterm relief to highly indebted EU member states, it is based on the expectation that bond yields will
emain low for the foreseeable future. The historical record, however, suggests that prolonged periods of low real bond yields are eventually replaced by periods of high real bond yields. And this phase may have already started. From a long-term sustainability perspective, we conclude that GDP serves as a better long-term nchor for the EU fscal framework than the bond rate. (Less)
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author
and
organization
publishing date
type
Book/Report
publication status
published
subject
keywords
interest rates, fiscal policy, public debt, European Union, euro area
in
In Focus
pages
10 pages
language
English
LU publication?
yes
id
0c371df3-d3b9-41c8-845a-eaba6cd6aeaa
alternative location
https://www.martenscentre.eu/publication/gdp-not-the-bond-yield-should-remain-the-anchor-of-the-eu-fiscal-framework/?amp=1
date added to LUP
2022-08-01 07:28:36
date last changed
2022-08-04 11:56:06
@techreport{0c371df3-d3b9-41c8-845a-eaba6cd6aeaa,
  abstract     = {{Declining bond yields and rising public debts have caused many economists to suggest raising the debt ceiling in the EU’s Stability and Growth Pact. Implicitly, they argue for replacing GDP as the anchor with the bond yield. We discuss the risks of such a shift. While such a change would provide short-term relief to highly indebted EU member states, it is based on the expectation that bond yields will remain low for the foreseeable future. The historical record, however, suggests that prolonged periods of low real bond yields are eventually replaced by periods of high real bond yields. And this phase may have already started. From a long-term sustainability perspective, we conclude that GDP serves as a better long-term anchor for the EU fiscal framework than the bond rate.}},
  author       = {{Andersson, Fredrik N G and Jonung, Lars}},
  keywords     = {{interest rates; fiscal policy; public debt; European Union; euro area}},
  language     = {{eng}},
  month        = {{07}},
  series       = {{In Focus}},
  title        = {{GDP, not the Bond Yield, should Remain the Anchor of the EU Fiscal Framework}},
  url          = {{https://www.martenscentre.eu/publication/gdp-not-the-bond-yield-should-remain-the-anchor-of-the-eu-fiscal-framework/?amp=1}},
  year         = {{2022}},
}