Tax Austerity: Does It Avert Solvency Crises?

Christos Shiamptanis

Journal of Money, Credit and Banking, 2024, vol. 56, issue 6, 1515-1543

Abstract: Many high‐debt countries are adopting tax austerity, whereby governments raise the tax rate as their debt levels rise with the hope to dispel future solvency crises. This paper investigates the impact of tax austerity on government debt solvency. A solvency crisis occurs once adverse shocks push the debt above its effective debt limit, the maximum level of debt that the government can repay. I show that the position of the effective debt limit depends on tax austerity. I find that high‐debt countries like Italy that undergo tax austerity could lower their effective debt limit and induce a solvency crisis.

Date: 2024
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https://doi.org/10.1111/jmcb.13034

Related works:
Working Paper: Tax Austerity: Does it Avert Solvency Crises? (2021)
Working Paper: Tax Austerity: Does it avert solvency crises? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:56:y:2024:i:6:p:1515-1543

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