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Long-Run Debt Ratios with Fiscal Fatigue

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  • Robertson, D.
  • Tambakis, D.

Abstract

We investigate the implications of fiscal fatigue – governments’ declining ability to increase primary fiscal balances with rising public debt - utilising the cubic policy rule estimated by Ghosh et al. (2013). We characterize its equilibrium debt-output ratios and fiscal space, and analyze its dynamic stability in the deterministic (long-run) case. There may be up to three equilibria, of which the intermediate one will typically require a stability criterion stricter than fiscal solvency. We illustrate numerically for six developed economies.

Suggested Citation

  • Robertson, D. & Tambakis, D., 2016. "Long-Run Debt Ratios with Fiscal Fatigue," Cambridge Working Papers in Economics 1674, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1674
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    More about this item

    Keywords

    Debt sustainability; Debt-output ratio; Fiscal policy rules.;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H0 - Public Economics - - General
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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