Fiscal policy in times of fiscal stress (or what to do when r > g)

Roy Havemann and Hylton Hollander

Journal of Policy Modeling, 2024, vol. 46, issue 5, 1020-1054

Abstract: South Africa runs a primary fiscal deficit and the long-term interest rate on government borrowing, r, is greater than the long-term economic growth rate, g. Without intervention, debt will continue to rise until there is a disorderly fiscal stop. Reforms to raise growth have not materialised, leaving fiscal consolidation as the second-best solution. Using a medium-sized, open-economy, fiscal DSGE model of South Africa, we show that the least cost policy is to impose a time-consistent fiscal policy rule with debt-to-GDP as the fiscal anchor and a pre-announced path for government consumption spending as the intermediate operational objective. This result obtains with and without explicit policy coordination between the fiscal and monetary authorities.

Keywords: Fiscal sustainability; Fiscal consolidation; Policy coordination; Optimal policy (search for similar items in EconPapers)
JEL-codes: E61 E62 E63 H63 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Fiscal policy in times of fiscal stress: Or what to do when r > g (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:46:y:2024:i:5:p:1020-1054

DOI: 10.1016/j.jpolmod.2024.07.001

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