New Research Project at the Chair of Monetary and International Macroeconomics, founded by the German Research Foundation DFG [29.10.26]
How can monetary unions cushion crises while keeping debt under control? Transfers between regions can cushion economic shocks, while strict debt rules are intended to prevent public deficits from becoming excessive. The new research project, “Stabilisation, Risk Sharing and Debt Sustainability: Fiscal Federal Structures and Strategic Incentives in Monetary Unions,” examines how these two policy instruments interact. Funded by the German Research Foundation (DFG), the project is conducted by the Chair of Monetary and International Macroeconomics under the direction of Michael Evers.
Image: Pixabay/Steve Buissinne
When a region faces economic difficulties, transfers can provide relief. At the same time, borrowing rules are often in place to ensure that public finances remain sustainable over the long term. Both instruments are important, but they can create conflicting incentives: financial support may weaken budgetary discipline, while strict borrowing limits can restrict the scope for necessary spending during a crisis.
These issues are the subject of considerable debate, as reflected in discussions about Germany’s debt brake, European fiscal rules and potential EU stabilisation mechanisms. Yet how transfer systems and debt rules interact has received little attention. In particular, there is a lack of analysis of how regional governments respond to different rules—for example, when setting taxes and public expenditure.
The new research project, “Stabilization, Risk Sharing, and Debt Sustainability,” investigates these questions using a quantitative macroeconomic model of monetary unions. The findings are expected to show when transfer systems and borrowing rules complement one another—and when they can partly substitute for each other. The project will provide an analytical basis for discussions on the future of the European fiscal framework and Germany’s debt brake.
The project, based at the Chair of Monetary and International Macroeconomics, is funded by the German Research Foundation (DFG) for three years, through 2029. It is led by Michael Evers, head of Chair.
