The SGP–Faulty by Design or Made Faulty by Politicians? An
Assessment Based on a Simulation Model

J 2014

The SGP–Faulty by Design or Made Faulty by Politicians? An Assessment Based on a Simulation Model

HORÁKOVÁ, Šárka and Robert JAHODA

Basic information

Original name

The SGP–Faulty by Design or Made Faulty by Politicians? An Assessment Based on a Simulation Model

Authors

HORÁKOVÁ, Šárka (203 Czech Republic, belonging to the institution) and Robert JAHODA (203 Czech Republic, guarantor, belonging to the institution)

Edition

Review of Economic Perspectives, Masarykova univerzita, 2014, 1213-2446

Other information

Language

English

Type of outcome

Článek v odborném periodiku

Field of Study

50200 5.2 Economics and Business

Country of publisher

Czech Republic

Confidentiality degree

není předmětem státního či obchodního tajemství

References:

URL

RIV identification code

RIV/00216224:14560/14:00076601

Organization unit

Faculty of Economics and Administration

DOI

http://dx.doi.org/10.2478/revecp-2014-0013

UT WoS

000446806400004

Keywords in English

Fiscal policy; primary balance; public debt; European Monetary Union; Stability and Growth Pact; fiscal sustainability

Abstract

V originále

By joining the European Monetary Union (the “EMU”), member countries lost the ability to use monetary policy as a tool for macroeconomic regulation. The attention was then focused on regulation of fiscal policy and Stability and Growth Pact (the “SGP”) was the instrument agreed upon. The states of the EMU have agreed to meet the 3% of GDP requirement for the maximum annual public budget deficit. Based on evolution of public debt in member countries, we can say that the SGP has failed as a tool for fiscal discipline. In this paper, we answer the question of whether the failure was due to the incorrect concept of the SGP or whether the development of the debt was affected more by arbitrary disrespect of the agreed rules. The two reasons mentioned above are interdependent. To separate them, we construct a dynamic model of EU countries’ public debt. By using real data, we simulate the potential values of public debt in a situation where the SGP rules have been respected in recent years. Comparing the results for the potential debt given by simulation of the model with the current real values, we are able to quantify the impact of non-compliance for each country. The initial results indicate that there are both EU states where non-compliance led to a negligible increase in public debt – up to 7% of GDP – and other states where this factor caused the growth of public debt by more than 30% of GDP.

Links

MUNI/A/0784/2013, interní kód MU

Name: Vybrané aspekty hodnocení efektivnosti a zásluhovosti veřejných politik (Acronym: Aspekty VEPO)

Investor: Masaryk University, Category A

Citovat

HORÁKOVÁ, Šárka and Robert JAHODA. The SGP–Faulty by Design or Made Faulty by Politicians? An Assessment Based on a Simulation Model. Review of Economic Perspectives. Masarykova univerzita, 2014, vol. 14, No 3, p. 249-265. ISSN 1213-2446. Available from: https://dx.doi.org/10.2478/revecp-2014-0013.

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   doi = {http://dx.doi.org/10.2478/revecp-2014-0013},
   keywords = {Fiscal policy; primary balance; public debt; European Monetary Union; Stability and Growth Pact; fiscal sustainability},
   language = {eng},
   issn = {1213-2446},
   journal = {Review of Economic Perspectives},
   title = {The SGP–Faulty by Design or Made Faulty by Politicians? An Assessment Based on a Simulation Model},
   url = {http://nho.econ.muni.cz/14-2014/3-2014/sgp-%E2%80%93-faulty-design-or-made-faulty-politicians-assessment-based-simulation-model},
   volume = {14},
   year = {2014}
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PB  - Masarykova univerzita
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KW  - primary balance
KW  - public debt
KW  - European Monetary Union
KW  - Stability and Growth Pact
KW  - fiscal sustainability
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L2  - http://nho.econ.muni.cz/14-2014/3-2014/sgp-%E2%80%93-faulty-design-or-made-faulty-politicians-assessment-based-simulation-model
N2  - By joining the European Monetary Union (the “EMU”), member countries lost the ability to use monetary policy as a tool for macroeconomic regulation. The attention was then focused on regulation of fiscal policy and Stability and Growth Pact (the “SGP”) was the instrument agreed upon. The states of the EMU have agreed to meet the 3% of GDP requirement for the maximum annual public budget deficit. Based on evolution of public debt in member countries, we can say that the SGP has failed as a tool for fiscal discipline. In this paper, we answer the question of whether the failure was due to the incorrect concept of the SGP or whether the development of the debt was affected more by arbitrary disrespect of the agreed rules. The two reasons mentioned above are interdependent. To separate them, we construct a dynamic model of EU countries’ public debt. By using real data, we simulate the potential values of public debt in a situation where the SGP rules have been respected in recent years. Comparing the results for the potential debt given by simulation of the model with the current real values, we are able to quantify the impact of non-compliance for each country. The initial results indicate that there are both EU states where non-compliance led to a negligible increase in public debt – up to 7% of GDP – and other states where this factor caused the growth of public debt by more than 30% of GDP.
ER  -

HORÁKOVÁ, Šárka and Robert JAHODA. The SGP–Faulty by Design or Made Faulty by Politicians? An Assessment Based on a Simulation Model. \textit{Review of Economic Perspectives}. Masarykova univerzita, 2014, vol.~14, No~3, p.~249-265. ISSN~1213-2446. Available from: https://dx.doi.org/10.2478/revecp-2014-0013.

Detailed Information on Publication Record