Debt stabilizing fiscal rules

Philippe Michel, Leopold von Thadden () and Vidal, Jean-Pierre ()
Additional contact information
Leopold von Thadden: European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html
Vidal, Jean-Pierre: European Central Bank,Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 576, Working Paper Series from European Central Bank

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. JEL Classification: E63; H62.

Keywords: Fiscal regimes; overlapping generations. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pbe
Date: 2006-01
View list of references View citations in EconPapers

Downloads: (external link)
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp576.pdf (application/pdf)

Related works:
Working Paper: Debt stabilizing fiscal rules (2005)
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: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20060576

Ordering information: This working paper can be ordered from
Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank
Address: Postfach 16 03 19, Frankfurt am Main, Germany
Contact information at EDIRC.
Series data maintained by Official Publications ().