Debt Stabilizing Fiscal Rules

55 Pages Posted: 17 Jan 2006

See all articles by Philippe Michel

Philippe Michel

National Center for Scientific Research (CNRS) - GREQAM (Deceased)

Leopold von Thadden

European Central Bank (ECB)

Jean-Pierre Vidal

European Central Bank (ECB)

Date Written: January 2006

Abstract

Unstable government debt dynamics can typically be corrected by various fiscal instruments, like appropriate adjustments in government spending, public transfers, or taxes. This paper investigates properties of state-contingent debt targeting rules which link stabilizing budgetary adjustments around a target level of long-run debt to the state of the economy. The paper establishes that the size of steady-state debt is a key determinant of whether it is possible to find a rule of this type which can be implemented under all available fiscal instruments. Specifically, considering linear feedback rules, the paper demonstrates that there may well exist a critical 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 level of long-run debt, there might be a conflict between a common fiscal framework which tracks deficit developments as a function of the state of the economy and the unrestricted choice of fiscal policy instruments at the national level.

Keywords: Fiscal regimes, Overlapping generations

JEL Classification: E63, H62

Suggested Citation

Michel, Philippe and von Thadden, Leopold and Vidal, Jean-Pierre, Debt Stabilizing Fiscal Rules (January 2006). ECB Working Paper No. 576, Available at SSRN: https://ssrn.com/abstract=873586 or http://dx.doi.org/10.2139/ssrn.873586

Philippe Michel

National Center for Scientific Research (CNRS) - GREQAM (Deceased)

Leopold Von Thadden (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jean-Pierre Vidal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
119
Abstract Views
1,854
Rank
422,437
PlumX Metrics