Inflation, Interest Rate and the Maastrich Rule

Abstract

Inflation and fiscal performance are interlinked and called for proper legislative and institutional requirements to implement policies. We argue that more attention should be paid to nominal indicators like inflation and nominal interest rate in designing fiscal rules and we attempt to corroborate our suggestion from multiple aspects. Debt decomposition indicates the importance of inflation and nominal interest rate in debt accumulation. Using a simple fiscal simulation, we demonstrate the effect of neglecting these nominal variables in the application of the most well-known European fiscal rule, the Maastricht (3 percent of GDP) rule.