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The Risks of Adopting the Bond Yield as the Anchor for the EU Fiscal Framework

Andersson, Fredrik N G LU and Jonung, Lars LU (2022) In Working Papers
Abstract
The EU’s fiscal rules, set out in the Maastricht Treaty of 1993 and the Stability and Growth Pact of 1997, are anchored to GDP. The debt ceiling and the deficit threshold are set to 60 percent and 3 percent of GDP, respectively. Recently, prominent economists and policymakers, have argued that that the debt ceiling should be raised due to falling bond yields. By extension, this argument suggests a shift from GDP anchoring to bond yield anchoring of the EU fiscal framework. We discuss the risks of basing the fiscal rules on the bond yield rather than on the GDP. While such a change would provide short-run relief to highly indebted EU member states, it implies high long-run risks to fiscal sustainability should bond yields rise in the... (More)
The EU’s fiscal rules, set out in the Maastricht Treaty of 1993 and the Stability and Growth Pact of 1997, are anchored to GDP. The debt ceiling and the deficit threshold are set to 60 percent and 3 percent of GDP, respectively. Recently, prominent economists and policymakers, have argued that that the debt ceiling should be raised due to falling bond yields. By extension, this argument suggests a shift from GDP anchoring to bond yield anchoring of the EU fiscal framework. We discuss the risks of basing the fiscal rules on the bond yield rather than on the GDP. While such a change would provide short-run relief to highly indebted EU member states, it implies high long-run risks to fiscal sustainability should bond yields rise in the future. We conclude that GDP serves as a better anchor for the EU fiscal framework than the bond rate under present circumstances. (Less)
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author
and
organization
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
Fiscal framework, European Union, ECB, Stability and Growth Pact, secular stagnation, modern monetary theory, government debt, fiscal policy, E50, E60, H60, N10
in
Working Papers
issue
2022:1
pages
19 pages
language
English
LU publication?
yes
id
b4584dc5-3fd6-4fd1-980b-ba15595d077f
date added to LUP
2022-01-28 14:30:37
date last changed
2024-03-11 15:26:47
@misc{b4584dc5-3fd6-4fd1-980b-ba15595d077f,
  abstract     = {{The EU’s fiscal rules, set out in the Maastricht Treaty of 1993 and the Stability and Growth Pact of 1997, are anchored to GDP. The debt ceiling and the deficit threshold are set to 60 percent and 3 percent of GDP, respectively. Recently, prominent economists and policymakers, have argued that that the debt ceiling should be raised due to falling bond yields. By extension, this argument suggests a shift from GDP anchoring to bond yield anchoring of the EU fiscal framework. We discuss the risks of basing the fiscal rules on the bond yield rather than on the GDP. While such a change would provide short-run relief to highly indebted EU member states, it implies high long-run risks to fiscal sustainability should bond yields rise in the future. We conclude that GDP serves as a better anchor for the EU fiscal framework than the bond rate under present circumstances.}},
  author       = {{Andersson, Fredrik N G and Jonung, Lars}},
  keywords     = {{Fiscal framework; European Union; ECB; Stability and Growth Pact; secular stagnation; modern monetary theory; government debt; fiscal policy; E50; E60; H60; N10}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{2022:1}},
  series       = {{Working Papers}},
  title        = {{The Risks of Adopting the Bond Yield as the Anchor for the EU Fiscal Framework}},
  url          = {{https://lup.lub.lu.se/search/files/173634258/WP22_1.pdf}},
  year         = {{2022}},
}