The Stability and Growth Pact is under fire. Problems have appeared in sticking to the rules. Proposals to reform the Pact or ditch it altogether abound. But is the Pact a flawed fiscal rule? Against established criteria for an ideal fiscal rule, its design and compliance mechanisms fare...

We propose a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these. We use this measure to calculate credit ratings for fourteen European countries over...

We investigate the effects of fiscal policy surprises for US data, using vector autoregressions. We overcome the difficulties that changes in fiscal policy may manifest themselves in variables other than fiscal variables first and that fiscal variables may respond ‘automatically’ to business...

The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, leading to deleveraging and credit crunch when the bubble burst....

This paper compares constraints on the public debt with constraints on the primary deficit. The analysis takes into account how an optimizing government reacts to the different constraints when deciding on a spending and borrowing plan. We find that the economy behaves similarly under both...

The Paper builds a simplified model describing the economy of a currency union with decentralized national fiscal policy, where the main features characterizing the policy-making are similar to those in EMU. National governments choose the size of deficit taking into account the two main rules...

The immediate background to this paper is the downgrade of the U.K.'s credit rating in February 2013, the market's view that this should have occurred earlier and the emphasis in fiscal policy on reducing debt rather than recovery from recession. We propose a measure of the U.K. sovereign credit...

A methodology for generating sovereign credit ratings based on macroeconomic theory is proposed. This is applied to quarterly U.S. data from 1970 to 2011. Over this period the official credit rating of U.S. Treasury securities has been of the highest quality. In contrast, the model-based measure...

European policy makers, notably in the euro area, seem to take for granted that the electorate will punish them for bold reform in product and labour markets. This may explain why progress in the euro area has been comparatively limited. This paper posits and, using a dataset for 21 OECD...

Does fiscal consolidation lead to social unrest? Using cross-country evidence for the period 1919 to 2008, we examine the extent to which societies become unstable after budget cuts. The results show a clear correlation between fiscal retrenchment and instability. We test if the relationship...