The Prudence Principle: A New Framework for Fiscal Policy

Mark Blyth and Eric Lonergan have presented their Forum paper on how, in principle, rules could be established that would be better than debt targets that have dominated in recent decades, especially in Europe.

 

An important political question today? How to deal with high levels of public debt after the Corona crisis – and how do previous debt and fiscal rules have to be reformed to achieve this? Mark Blyth from Brown University and Eric Lonergan of M&G Investments have presented their proposition of a new debt rule: the prudence principle. The idea is to have two different set of rules – depending on the economic regime, namely the relationship of interest rates on government bonds and growth rates. Their proposal was discussed with: Jakob von Weizsäcker, Chief Economist at the Federal Ministry of Finance, Peter Bofinger from the University of Würzburg and Véronique Riches-Flores from Paris.

Rewatch the session

Here, you can find the proposal by Mark Blyth and Eric Lonergan:

And their presentation slides:

In his presentation, Peter Bofinger has also developed an alternative reform of fiscal rules, focussing on the joint effects of fiscal and monetary policy, and extending Milton Friedmans famous quote to something like: inflation is always and everywhere a monetary (and a fiscal) phenomenon. You find the presentation slides here. His proposal is also written down in an article here.

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