Carolina Ulloa Suarez 

Fiscal rules and fiscal vulnerability in the Euro area (joint with Gilles Dufrénot) 

This paper studies the sustainability of public finance in the euro area, in terms of fiscal policy rules. We provide some empirical arguments to motivate the new fiscal rule adopted in the Treaty on Stability, Coordination and Governance (TSCG) in 2013. According to this rule, not only do the countries have to follow a debt and deficit target, but they must also close their deficit gap by reducing by one-twentieth each year any excess of debt over the 60% benchmark. We show that, without the latter rule – that links both deficit and debt targets- the debt and deficit ratio to GDP are unsustainable. Our starting point is the concept of fiscal vulnerability introduced by Collignon (2012). This paper proposes a new approach of debt sustainability based on solvency risk and some conditions on the fiscal reaction functions which ensure compliance with the long-term stability of the steady states of debt and deficit. This framework is extended here in several manners. First, the interest rate that is a central element of the debt dynamics is made endogenous. This implies that the upper bound of the interest rate-growth differential depends upon the reaction of financial market’s to macro-financial imbalances. Second, the structural heterogeneity of the euro area countries is taken into account by using estimates based on quantile regressions. Comparing two rules – one with only a debt and deficit target, and one with some additional constraint on the reduction of the gap, we find that the former fiscal rule existing before the 2013 reform, led to unsustainable public finance, while the TSCG would have been stabilizing, had it been applied since the start of the euro area.

Anushka Chawla

Parental involvement in spouse choice: implications for marriage outcomes