Government Expenditure Ceiling and Public Debt Dynamics in a Demand-led Macromodel

Rafael Saulo Marques Ribeiro () and Gilberto Lima

No 2017_35, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: This article explores some aspects of the debate about the efficacy of a fiscal rule that sets a government expenditure ceiling for the stabilisation of the public debt-to-output ratio. We develop a demand-led macromodel that assumes a closed economy operating with excess capacity and show that a fiscal rule that sets a limit for government spending, excluding the payment of interests, may not ensure a non-explosive trajectory of the public debt-to-output ratio. Our model allows us to map out different outcomes in terms of the stabilisation of the public debt stemming from the process of fiscal consolidation and conclude that the commitment of the fiscal authority to comply with the ceiling by cutting government spending is less likely to stabilise the public debt-to-output ratio in economies enduring excessively high interest rates accompanied by more regressive taxation systems. Our model also suggests that a more progressive tax structure may increase the likelihood of public debt stabilisation in the long run.

Keywords: Fiscal policy; government expenditure ceiling; growth; public debt stability; income distribution. (search for similar items in EconPapers)
JEL-codes: C01 C02 E62 O40 (search for similar items in EconPapers)
Date: 2017-12-22
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Government expenditure ceiling and public debt dynamics in a demand-led macromodel (2019)
Working Paper: Government expenditure ceiling and public debt dynamics in a demand-led macromodel (2018)
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