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Barnes, Casey

Articles by Barnes, Casey

Euro area budget rules on spending must avoid the pro-cyclicality trap

June 17, 2019

Despite three generations of the Stability and Growth Pact (SGP) rules, the EU rules have failed fully to meet their objectives. Recent debate in Europe has focused on increasing the role of an expenditure rule in the EU framework (e.g. Beetsma et al. 2018; Darvas et al. 2018, and Bénassy-Quéré et al. 2018).
This would restrict spending to grow in line with the growth of sustainable output, adjusting for a debt brake element:
Government spending growth = Real potential output growth + inflation – debt brake term
In this column we look at the performance of the EU’s existing Expenditure Benchmark from the perspective of policymakers aiming to stabilise the cycle in real-time by following a spending rule. We suggest a real danger that faulty potential output estimates lead to

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