Debt stability under entitlement spending

Floriana, Cerniglia, Enzo Dia and Andrew Hughes Hallett

No 351, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: Economists have traditionally used a simple rule that restricts primary deficits to less than a threshold given by the interest rate-growth rate differential and existing debt level to judge fiscal sustainability. This rule derives from a single period application of the government's budget constraint. It does not allow for the predictable dynamic effects of spending liabilities, such as entitlement spending. In this paper, we derive the equivalent dynamic rule for this case. It still depends on the interest-growth rate differential, but now includes a restriction on spending growth in relation to income growth. Several new results emerge. Debt remains stable; but the rate of convergence to stability varies with different parameters. And the growth in spending has to be less than a damping factor that controls convergence. This puts a limit on spending growth. To penalize the use of unpopular taxes further limits debt and the incentive to use debt finance.

Keywords: Sustainable public debt; primary de cit rules; scal space. (search for similar items in EconPapers)
JEL-codes: E62 H53 H63 I38 (search for similar items in EconPapers)
Pages: 34
Date: 2016-10-07, Revised 2016-10-07
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://repec.dems.unimib.it/repec/pdf/mibwpaper351.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:351

Access Statistics for this paper

More papers in Working Papers from University of Milano-Bicocca, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Matteo Pelagatti ().