Fiscal Sustainability, Macroeconomic Stability, and Welfare under Fiscal Discipline in a Small Open Economy

Keiichi Morimoto (), Takeo Hori (), Noritaka Maebayashi () and Koichi Futagami
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Takeo Hori: College of Economics, Aoyama Gakuin University
Noritaka Maebayashi: Graduate School of Economics, Osaka University

No 13-07, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: We construct a small open economy model of endogenous growth with public capital accumulation and examine how a debt policy rule under which the government gradually reduces its debt-GDP ratio to a target level affects macroeconomic stability, fiscal sustainability, and welfare. We obtain the following implications for fiscal policy design in small countries. First, to ensure fiscal sustainability, the government should adjust public spending rather than the income tax rate to finance public debt. In addition, it has to set the target level of the debt-GDP ratio sufficiently low to avoid expectations-driven economic instabilities. Under sustainability and stability, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).

Keywords: Fiscal policy; Public debt; Welfare; Fiscal sustainability; Equiribrium indeterminacy (search for similar items in EconPapers)
JEL-codes: E32 E62 H63 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2013-05
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:1307

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