Fiscal sustainability using growth-maximizing debt targets

Cristina Checherita-Westphal, Andrew Hughes Hallett and Philipp Rother
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

Applied Economics, 2014, vol. 46, issue 6, 638-647

Abstract: This article highlights the importance of debt-related fiscal rules and derives growth-maximizing public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should maintain if they wish to maximize growth for panels of OECD, EU and euro area countries. These are not arbitrary numbers, but are founded on long-run optimizing behaviour assuming that governments implement the golden rule of financing; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15% points lower than the estimate for the growth-maximizing debt ratio in our OECD sample and comfortably within the Stability and Growth Pact's debt ceiling of 60% of GDP. We also indicate how forward-looking budget reaction functions fit into a debt targeting framework.

Date: 2014
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Citations: View citations in EconPapers (48)

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Working Paper: Fiscal sustainability using growth-maximising debt targets (2012)
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DOI: 10.1080/00036846.2013.861590

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