This project has received funding via the EUI Research Council call 2026.
Rising fiscal imbalances and growing public debt across many countries are placing increasing pressure on macroeconomic policy frameworks. Long-term interest rates remain low by historical standards, leaving limited space for central banks to respond forcefully to future downturns. At the same time, elevated debt levels are narrowing fiscal space, especially in economies already facing structural budget pressures. This project aims to explore how these evolving constraints—on both the monetary and fiscal sides—may interact, and how their intersection could constrain policymakers, potentially threatening macroeconomic stability.
The analysis focuses on the possibility that recessions might lead to fiscal stress or sovereign crises when monetary policy is constrained by the zero lower bound (ZLB) and fiscal space is limited due to high debt. The project examines how demand shocks, limited monetary flexibility, and fragile fiscal fundamentals might interact in a way that amplifies downturns and destabilises expectations. In such an environment, what begins as a typical recession could, under certain conditions, evolve into a severe fiscal crisis through mutually reinforcing mechanisms.
This project investigates the macroeconomic risks posed by the joint presence of the ZLB constraint and the fiscal limit, resulting from the substantial public debt accumulated during the pandemic. In the model, both the ZLB and the fiscal limit may emerge endogenously from within the macroeconomic system. Rather than treating these constraints as fixed and separate boundaries, the project models them as state-dependent—shaped by prevailing macroeconomic conditions and expectations—and emphasizes how their interaction can reinforce and amplify macroeconomic risks.