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The Fallacy of Fiscal Discipline

Paolo Canofari (), Alessandro Piergallini () and Giovanni Piersanti ()

MPRA Paper from University Library of Munich, Germany

Abstract: Fiscal discipline is commonly evaluated on the basis of the debt-GDP ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onwards for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.

Keywords: Fiscal Discipline; Financial Wealth; Sustainability Indicators. (search for similar items in EconPapers)
JEL-codes: E60 E62 H60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-mac
Date: 2018-03-12
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