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| Philippe Michel, Leopold Von thadden and Jean-pierre Vidal |
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| ''Debt Stabilizing Fiscal Rules'' |
| ( 2010, Vol. 12 No.5 ) |
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| Unstable government debt dynamics can typically be stabilized
around a certain target level of debt by adjustments in
various fiscal instruments, like government spending, transfers,
or taxes. This paper investigates properties of debt stabilizing
rules which link the needed budgetary adjustments
to the state of the economy. The paper establishes that the
magnitude of the target level of long-run debt is a key determinant
of whether it is possible to find a rule of this type
that can be implemented under all available fiscal instruments.
Specifically, considering linear feedback rules, the
paper demonstrates that there may well exist a critical target
level of debt beyond which this is no longer possible. From
an applied perspective, this finding is of particular relevance
in the context of a monetary union with decentralized fiscal
policies. Depending on the target level of debt, there might
be a conflict between a common fiscal framework that tracks
deficit developments as a function of the state of the economy
and the unrestricted choice of fiscal policy instruments
at the national level. |
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| Keywords: |
JEL: H0 - Public Economics: General
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| Manuscript Received : Oct 19 2010 | | Manuscript Accepted : Mar 07 2012 |
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