Debt stabilizing fiscal rules

Philippe Michel, Leopold von Thadden () and Jean-Piere Vidal

No 349, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: Unstable government debt dynamics can typically be corrected by various fiscal instruments, like appropriate adjustments in government spending, public transfers, or taxes. This paper investigates properties of state-contingent debt targeting rules which link stabilizing budgetary adjustments around a target level of long-run debt to the state of the economy. The paper establishes that the size of steady-state debt is a key determinant of whether it is possible to find a rule of this type which can be implemented under all available fiscal instruments. Specifically, considering linear feedback rules, the paper demonstrates that there may well exist a critical level of debt beyond which this is no longer possible. From an applied perspective, this finding is of particular relevance in the context of a monetary union with decentralized fiscal policies. Depending on the level of long-run debt, there might be a conflict between a common fiscal framework which tracks deficit developments as a function of the state of the economy and the unrestricted choice of fiscal policy instruments at the national level

Keywords: Fiscal regimes; overlapping generations (search for similar items in EconPapers)
JEL-codes: E63 H62 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Debt Stabilizing Fiscal Rules (2010)
Working Paper: Debt stabilizing fiscal rules (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:349

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