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The problem of debt stabilization: An alternative approach

Claudio Sardoni ()

No 6, Working Papers - Dipartimento di Economia from Dipartimento di Economia, Sapienza University of Rome

Abstract: The paper deals with the problems of fiscal sustainability and the stabilization of the public debt. It criticizes the mainstream approach to these issues and argues that an approach inspired by Domar's contribution is preferable. While mainstream analyses of debt stabilization are based on the hypothesis that the economy's growth rate is independent of public spending and its composition, in the paper this hypothesis is removed. The growth rate is made dependent on the composition of public spending. In this analytical context, ensuring the stabilization of the ratio of the public debt to the GDP does not necessarily requires running a primary surplus, which instead is the fundamental mainstream conclusion when the interest rate on the debt is higher than the economy's growth rate. The debt ratio can be stabilized through increases in the economy's growth rate caused by adequate changes in the composition of public expenditure.

JEL-codes: E62 H62 O4 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2009, Revised 2009
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