The SGP Fiscal Rule in the Case of Sluggish Growth: Some Alternative Simulations

Abstract

The paper by Breuss/Roeger (2005) investigates macroeconomic effects of the Stability and Growth Pact (SGP) in the Euro Area (EA). For this purpose, the authors undertake simulations with the QUEST Model of the European Commission, both without and with the assumption that the rules of the SGP are observed. After describing in some detail the main features of the QUEST Model, a macroeconomic multi-country model combining neoclassical and Keynesian features, they give a survey of macroeconomic developments in the European Economic and Monetary Union (EMU) during the last years, with special emphasis upon fiscal policies and the SGP. The core of the paper consists of a description and interpretation of the simulations with the QUEST Model. Differences between results under a supply and under a demand shock are pointed out. As a central conclusion, the authors give the SGP higher scores in the case of a supply shock than under a demand shock.