The Perils of Fiscal Rules
Maxime Menuet (),
Alexandru Minea () and
Patrick Villieu ()
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Maxime Menuet: CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique
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This paper develops a limit-cycle-based theory of debt fluctuations through a simple endogenous growth model. Public debt and deficit are introduced by relaxing the balanced-budget rule hypothesis, and assuming a simple fiscal rule. Our main result is that fiscal rules can be destabilizing, leading to (i) multiple equilibria-four balanced-growth paths can emerge-, (ii) endogenous public debt cycles, which appear both in the short and the long run, and (iii) hysteresis phenomena arising from extreme sensitivity of changes in parameters. We also reveal that a balanced-budget rule does not preclude large aggregate fluctuations. Finally, our calibration exercise highlights that our model produces asymmetric cycles consistent with observed stylized facts.
Keywords: Fiscal rules; Indeterminacy; Limit cycle; Public Debt; Bifurcation (search for similar items in EconPapers)
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Working Paper: The Peril of Fiscal Rules (2019)
Working Paper: The Perils of Fiscal Rules (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-02291307
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