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Government Debt, Fiscal Rules and Singular Growth Dynamics

In: Inequality and Finance in Macrodynamics

Author

Listed:
  • Paulo Brito

    (ISEG and UECE)

Abstract

A fiscal rule controlling the government surplus as a function of the deviation of the actual debt ratio from a target level is introduced in an otherwise benchmark endogenous growth model in which productive government expenditures are financed by taxes and government debt. This generates a feedback mechanism from the government debt ratio to expenditure that can generate impasse-singular dynamics, in the sense that rates of growth can become locally infinitely valued. We characterize locally the different impasse-singular dynamics that can exist and discuss their consequences for the existence and characterization of general equilibrium endogenous growth paths, for different parameterizations of the fiscal rule. We present some consequences of impasse-singular dynamics generated by particular fiscal rules, which are not present in regular models: existence of multiple over-determinate balanced growth paths (BGP), existence of constraints in the domain of existence of determinate equilibrium paths converging to a regular BGP, and the existence of singular BGP’s.

Suggested Citation

  • Paulo Brito, 2017. "Government Debt, Fiscal Rules and Singular Growth Dynamics," Dynamic Modeling and Econometrics in Economics and Finance, in: Bettina Bökemeier & Alfred Greiner (ed.), Inequality and Finance in Macrodynamics, pages 43-74, Springer.
    • Handle: RePEc:spr:dymchp:978-3-319-54690-2_3
    DOI: 10.1007/978-3-319-54690-2_3
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    References listed on IDEAS

    as
    1. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
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    3. Alfred Greiner & Bettina Fincke, 2015. "Public Debt, Sustainability and Economic Growth," Springer Books, Springer, edition 127, number 978-3-319-09348-2, June.
    4. Alfred Greiner, 2008. "Does it Pay to Have a Balanced Government Budget?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(3), pages 460-476, September.
    5. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    6. Schmitt-Grohe, Stephanie & Uribe, Martin, 1997. "Balanced-Budget Rules, Distortionary Taxes, and Aggregate Instability," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 976-1000, October.
    7. Nishimura, Kazuo & Seegmuller, Thomas & Venditti, Alain, 2015. "Fiscal policy, debt constraint and expectations-driven volatility," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 305-316.
    8. Futagami, Koichi & Iwaisako, Tatsuro & Ohdoi, Ryoji, 2008. "Debt Policy Rule, Productive Government Spending, And Multiple Growth Paths," Macroeconomic Dynamics, Cambridge University Press, vol. 12(4), pages 445-462, September.
    9. Andreas Irmen & Johanna Kuehnel, 2009. "Productive Government Expenditure And Economic Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 692-733, September.
    10. Paulo B. Brito & Luís F. Costa & Huw D. Dixon, 2017. "From Sunspots to Black Holes: Singular Dynamics in Macroeconomic Models," Studies in Economic Theory, in: Kazuo Nishimura & Alain Venditti & Nicholas C. Yannelis (ed.), Sunspots and Non-Linear Dynamics, chapter 0, pages 41-70, Springer.
    11. Akira Kamiguchi & Toshiki Tamai, 2012. "Are Fiscal Sustainability And Stable Balanced Growth Equilibrium Simultaneously Attainable?," Metroeconomica, Wiley Blackwell, vol. 63(3), pages 443-457, July.
    12. Kazuo Nishimura & Alain Venditti & Nicholas C. Yannelis (ed.), 2017. "Sunspots and Non-Linear Dynamics," Studies in Economic Theory, Springer, number 978-3-319-44076-7, January.
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    More about this item

    Keywords

    Government Expenditure; Government Bond; Debt Ratio; Government Debt; Balance Growth Path;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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