OPTIMAL LONG-RUN BUDGETARY POLICIES SUBJECT TO THE MAASTRICHT CRITERIA OR A STABILITY PACT

Maria Dworak, Franz Wirl, Alexia Fürnkranz-Prskawetz and Gustav Feichtinger

Macroeconomic Dynamics, 2002, vol. 6, issue 5, 665-686

Abstract: We investigate the optimal path of the primary surplus that a government will choose to minimize costs that derive from exceeding the Maastricht criteria and generally of a “stability pact,” where we assume three components of costs that are related to (1) the debt-to-GDP ratio, (2) the overall deficit-to-GDP ratio, and (3) the acceptance level of savings in the economy. We show that various political-economic settings can result in completely different equilibrium strategies of the debt-to-GDP ratio and the primary deficit. The spectrum of possible optimal strategies ranges from no stationary solutions to multiple equilibrium and cyclical solutions and from positive to negative levels of the optimal debt-to-GDP ratio. Our results emphasize the importance of macroeconomic and behavioral (acceptance rate of a policy) variables in order to explain complex economic time series.

Date: 2002
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