134 - The sustainability of euro area debt: a re-assessment

DNB Working Papers
Publicatiedatum 10 april 2007

This paper re-assesses findings of the literature that the systematic debt stabilising response in
fiscal policy has been sufficiently strong for keeping debt ratios on a sustainable path in Euro
area countries. In doing so, it adjusts the standard approach to the specific context of Economic and Monetary Union. Results show that before 1993 policy responses towards net and gross debt are comparable. After 1993, the reaction to net debt weakens while policies react more strongly to the build-up of gross debt according to the definition of the EU fiscal rules. This suggests that financial assets have increasingly been used for managing gross debt ratios while improving net worth has received less priority. JEL codes: E62, H62, H63. Keywords: debt, sustainability, EMU, stock flow adjustment