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The Algebra of Government Debt

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  • Helmut Frisch
  • Franz X. Hof

Abstract

A fiscal policy which achieves a reduction of the debt to GDP ratio below its initial level is labeled as fiscal retrenchment policy. In this paper we investigate four types of fiscal retrenchment policies. Type 1 describes a policy where the government chooses a constant primary budget surplus to GDP ratio, type 2 a policy where the government chooses a constant overall budget deficit to GDP ratio to achieve the reference value of the debt to GDP ratio. Following type 3, the Strong Gros-Rule, the government reduces the debt to GDP ratio every year by 5% of the discrepancy observed at the beginning of the fiscal retrenchment program and the target value. Finally, a type 4 policy (the Weak Gros-Rule) is investigated where the debt to GDP ratio declines every year by 5% of the difference between the one-period lagged debt ratio and the reference value.

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  • Helmut Frisch & Franz X. Hof, 1996. "The Algebra of Government Debt," CESifo Working Paper Series 121, CESifo.
    • Handle: RePEc:ces:ceswps:_121
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    Cited by:

    1. Hans-Werner Sinn, 1999. "Inflation and Welfare: Comment on Robert Lucas," NBER Working Papers 6979, National Bureau of Economic Research, Inc.
    2. A. Prskawetz, 1998. "Government Debt, Budget Surplus, and Popularity of Politicians," Journal of Optimization Theory and Applications, Springer, vol. 98(1), pages 131-149, July.

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