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Fiscal Policy Dynamics With A Public-Debt Guideline

Author

Listed:
  • Zvi Hercowitz

    (Tel-Aviv University)

  • Michel Strawczynski

    (Bank of Israel)

Abstract

This paper analyzes the implications of a cost of deviating upwards from a public debt/output guideline, such as the 0.6 ratio in the Maastricht Treaty, in the context of a fiscal policymaking model. Given a preannounced timetable for enforcement, the dynamic paths of the tax rate and government spending, which depart from smoothing over time, and the public debt are characterized. The model’s predictions are that the tax rate is high and government spending is low prior to the date of starting enforcement, and that at this date the tax rate begins to decline and government spending begins to increase. The model is used to interpret fiscal evidence during the 1990s from three countries with large public debt: Belgium, Italy and Israel

Suggested Citation

  • Zvi Hercowitz & Michel Strawczynski, 2004. "Fiscal Policy Dynamics With A Public-Debt Guideline," Israel Economic Review, Bank of Israel, vol. 2(1), pages 91-106.
    • Handle: RePEc:boi:isrerv:v:2:y:2004:i:1:p:91-106
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    References listed on IDEAS

    as
    1. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-652, August.
    2. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    3. Torres,Francisco & Giavazzi,Francesco (ed.), 1993. "Adjustment and Growth in the European Monetary Union," Cambridge Books, Cambridge University Press, number 9780521440196, October.
    4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
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    Cited by:

    1. Michel Strawczynski & Joseph Zeira, 2013. "Procyclicality of Fiscal Policy in Emerging Countries: The Cycle is the Trend," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Jordi Galí (ed.),Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 11, pages 427-466, Central Bank of Chile.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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