Sustainable Fiscal Policy with Rising Public Debt-To-Gdp Ratios

P. Marcelo Oviedo ()

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: In financial and economic policy circles concerned with public debt in developing countries, a rising debt-GDP ratio is interpreted as a signal of overborrowing, warning of debt defaults if strong fiscal corrections are not adopted in time. This paper shows why this interpretation is incorrect by building a simple model of fiscal policy in which upward-sloping debt paths are observed even though the probability of default is ``almost surely" equal to zero.

Keywords: public debt; fiscal policy; debt sustainability; debt limits (search for similar items in EconPapers)
JEL-codes: E62 F34 F37 H63 (search for similar items in EconPapers)
Date: 2006-11-27
New Economics Papers: this item is included in nep-mac and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:12701

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