Deficit Targeting Strategies

Using stochastic simulations, this article analyses the probability distribution of a country's deficit ratio under fixed exchange rates and a variety of monetary and fiscal policy rules. The purpose is to show how the probability of an ‘excessive deficit’, defined by Europe's Stability Pact as a deficit to GDP ratio above 3 per cent, varies with different deficit targets and policy rules. Using a macro model, we find that when subject to historically consistent shocks, these fiscal ratios typically have a wide distribution, with fat tails and significantly longer tails on the upper side. That means fiscal targets may have to be country‐specific and conservative, and that fiscal policy has to be forward‐looking to keep the probability of excessive deficits below acceptable limits

Consolidation (business · Distribution (mathematics · Econometrics · Economics · European union · Exchange rate · Fiscal deficit · Fiscal policy · Fixed exchange rates · Geography · International economics · Macro · Member states · Monetary economics · Pact · Stability (learning theory · Stability and Growth Pact · Computer Science · Finance · Fiscal Policies and Political Economy · Global Financial Crisis and Policies · Mathematics · Monetary Policy and Economic Impact

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  Open Access•Michael J Artis, Marco Buti•JCMS Journal of Common Market…•2000

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• Choosing the Regime

  Open Access•Ray Barrell, Karen Dury•JCMS Journal of Common Market…•2000

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