literature has progressed with more elaborate models mainly by going numerical. in what follows, we seek insights by examining alternative scenarios in known macroeconomic episodes constructed using totem. 3. 1 counterfactual 1 : purvis ’ s 1985 warning is heeded immediately as discussed above, doug expressed considerable concern in 1985 about the medium - term debt implications of fiscal policies in place at the time. although budget deficits began a slow decline around that time, these efforts really became aggressive after the emergence of international financial market pressures in 1994 – 95. as noted earlier, the headwind of declining oil prices posed a significant challenge for fiscal policy during the 1980s. accordingly, in our first counterfactual, we ask what the implications for the economy might have been had doug ’ s warning been heeded immediately, with the federal deficit brought into balance over the five years from 1985 to 1990, about five years earlier than when it actually occurred. the historical and counterfactual budget deficits are shown in chart 7, along with a number of other simulation results. in this totem simulation, monetary policy is modelled using a reaction function estimated on historical data that aims to keep inflation and therefore aggregate demand ( or real gdp ) close to their actual historical paths. since neither fiscal nor monetary policy is modelled as truly optimal, we are abstracting from the possibility that different policies might have offered a different, potentially superior, set of macroeconomic bis central bankers ’ speeches outcomes. we are also abstracting from a key monetary policy issue at the time, namely, the lack of a well - defined policy target, as inflation targets were not formally introduced until 1991. totem is built on a credible inflation target and a mixture of rules of thumb and rational expectations. despite these caveats, the simulation is instructive. the shock we analyze is a series of cuts to government spending beginning in 1985 that brings the federal budget into balance by 1990 and holds it there. notice that, given the importance of debt servicing to federal spending at the time, this would have meant a significant surplus of 4 to 5 per cent of gdp measured in primary terms ( i. e., net of interest payments ). obviously, since we are basing our counterfactuals on actual history, starting points will matter to the simulations. according to our model, under this assumption of aggressive fiscal consolidation, the federal debt would have peaked at about 50 per cent of gdp in 1986 – 89, instead of around 67 per cent

area fiscal stance is expected to continue to provide some support to economic activity. in view of the weak economic outlook, the governing council welcomes the eurogroup ’ s call in december for differentiated fiscal responses and its readiness to coordinate. governments with fiscal space should be ready to act in an effective and timely manner. in countries where public debt is high, governments need to pursue prudent policies and meet structural balance targets, which will create the conditions for automatic stabilisers to operate freely. all countries should intensify their efforts to achieve a more growth - friendly composition of public finances. likewise, the transparent and consistent implementation of the european union ’ s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. improving the functioning of economic and monetary union remains a priority. the governing council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union. we are now ready to take your questions. 3 / 3 bis central bankers'speeches