Fiscal Sustainability and Public Debt in an Endogenous Growth Model

44 Pages Posted: 13 Dec 2004

See all articles by Jesús Fernández-Huertas Moraga

Jesús Fernández-Huertas Moraga

Charles III University of Madrid; Instituto de Análisis Económic (IAE) Barcelona

Jean-Pierre Vidal

European Central Bank (ECB)

Date Written: October 2004

Abstract

This paper investigates fiscal sustainability in an overlapping generations economy with endogenous growth coming from human capital formation through educational spending. We assess how budgetary imbalances affect economic dynamics and the outlook for economic growth, thereby providing a rationale for fiscal rules ensuring sustainability. Our results show that the appropriate response of fiscal policy to temporary shocks is not trivial in the absence of fiscal rules. Fiscal rules allow for a timely reaction, thereby avoiding possibly disruptive fiscal adjustment in the future: the more adjustment is delayed, the larger is its necessary scale. We perform a rough calibration of the model to simulate the effects of a demographic shock (change in the population growth rate) under different fiscal policy scenarios.

Keywords: Fiscal sustainability, public debt, overlapping generations

JEL Classification: E62, H63, H55, O41, E17

Suggested Citation

Moraga, Jesús Fernández-Huertas and Vidal, Jean-Pierre, Fiscal Sustainability and Public Debt in an Endogenous Growth Model (October 2004). Available at SSRN: https://ssrn.com/abstract=587262 or http://dx.doi.org/10.2139/ssrn.587262

Jesús Fernández-Huertas Moraga (Contact Author)

Charles III University of Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Instituto de Análisis Económic (IAE) Barcelona

Barcelona, Bellaterra 08193
Spain

Jean-Pierre Vidal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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