DP14431 What's Wrong with Fiscal Space?

Author(s): Charles Wyplosz
Publication Date: February 2020
Keyword(s): Counter-cyclical fiscal policy, Fiscal space, intertemporal budget constraint
JEL(s):
Programme Areas: Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14431

The concept of fiscal space, often discussed in European policymaking circles, is intuitively appealing but fraught with daunting challenges. In principle, it is meant to indicate how expansionary fiscal policy can be in the short run given longer term concerns. The proper basis should be the intertemporal budget constraint, but that is not what the Commission does. This paper suggests how to use the constraint to evaluate the fiscal space. Instead of aiming at a single number (with or without confidence intervals) it transparently links the computation of the fiscal space to explicit assumptions about the unknown future.