Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331605 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12139
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
This paper investigates whether the new expenditure rule of the European Union (EU) can restore dynamic stability and determinacy with bounded public debt in an otherwise unstable economic environment. We build upon the standard New Keynesian dynamic general equilibrium model so as to compare our results to the well-known results of Leeper (1991, 2016) and, more generally, to the literature on the fiscal-monetary policy mix. We find that the EU's new fiscal rule, despite its intentions, works practically like active fiscal policy. Given this, it does not leave room for active monetary (interest rate) policy; instead, the central bank has to accommodate the active fiscal policy which means that the policy interest rate can react only weakly to inflation. This will undermine the ECB's key mandate.
Subjects: 
fiscal rules
macroeconomic policy assignment
JEL: 
E62
E63
E52
Document Type: 
Working Paper
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