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Fiscal Sustainability, Macroeconomic Stability, and Welfare under Fiscal Discipline in a Small Open Economy

Author

Listed:
  • Keiichi Morimoto

    (Department of Economics, Meisei University)

  • Takeo Hori

    (College of Economics, Aoyama Gakuin University)

  • Noritaka Maebayashi

    (Graduate School of Economics, Osaka University)

  • Koichi Futagami

    (Graduate School of Economics, Osaka University)

Abstract

We construct a small open economy model of endogenous growth with public capital accumulation and examine how a debt policy rule under which the government gradually reduces its debt-GDP ratio to a target level affects macroeconomic stability, fiscal sustainability, and welfare. We obtain the following implications for fiscal policy design in small countries. First, to ensure fiscal sustainability, the government should adjust public spending rather than the income tax rate to finance public debt. In addition, it has to set the target level of the debt-GDP ratio sufficiently low to avoid expectations-driven economic instabilities. Under sustainability and stability, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).

Suggested Citation

  • Keiichi Morimoto & Takeo Hori & Noritaka Maebayashi & Koichi Futagami, 2013. "Fiscal Sustainability, Macroeconomic Stability, and Welfare under Fiscal Discipline in a Small Open Economy," Discussion Papers in Economics and Business 13-07, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1307
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    References listed on IDEAS

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    Cited by:

    1. Kunihiko Konishi, 2013. "Public Research Spending in an Endogenous Growth Model," Discussion Papers in Economics and Business 13-26, Osaka University, Graduate School of Economics.

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    More about this item

    Keywords

    Fiscal policy; Public debt; Welfare; Fiscal sustainability; Equiribrium indeterminacy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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