Debt Thresholds and Unemployment Nexus: A Study on Fiscal–Monetary Policy Interactions Across the EU Member States

This study examines the regime-dependent threshold between fiscal and monetary policy interactions across the EU-27 states, utilizing quarterly data from 2000 to 2025. A fixed-effects panel threshold regression model has been adopted in this study, using endogenously determined debt thresholds, to assess how budget, debt, money supply, inflation, and fluctuations in interest rates interact under different debt regimes. This analysis also incorporates shock dummy variables following mild recessions and inflationary pressures, the global financial crisis, the sovereign debt crisis, the COVID-19 pandemic, and recent energy price and inflationary shocks. Consequently, three major findings emerge: firstly, fiscal deficits increase unemployment across both regimes, but their positive contribution is significantly reduced by 81% in high-debt regimes. Therefore, conventional Ricardian equivalence has been supported throughout this study in terms of precautionary savings and crowding-out impacts, which further contribute to intensifying with alternative debt regimes. Secondly, monetary variables, in this paper, have demonstrated limited direct effects on unemployment mitigation that highlight the transmission mechanisms under high-debt regimes. Thirdly, the effectiveness of crisis response critically depends on existing fiscal spaces, while the debt regime is interconnected with labor market outcomes. The main findings of the study provide empirical support for the Maastricht debt criterion of 60% as a structural threshold, which is a benchmark for a fundamental shift in the policy transmission mechanism. This study has identified rules and regulations for uniform fiscal consolidation as insufficient; rather, state-contingent governance frameworks have been highly recommended for managing asymmetrical fiscal–monetary policy interactions across different debt regimes. Furthermore, it contributes to the reformation of the more impactful fiscal and monetary policy interaction rule under a monetary union.