Debt stabilizing fiscal rules

Philippe Michel, Jean-Pierre Vidal and Leopold von Thadden

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)
Date: 2006-01
Note: 147733
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Debt Stabilizing Fiscal Rules (2010)
Working Paper: Debt stabilizing fiscal rules (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2006576

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