Debt, Growth and Budgetary Regimes

Within the Barro (1990) model of productive public services, but with the inclusion of public debt, we derive and characterize on the balanced growth path, a set of welfare‐maximizing fiscal rules under two budgetary regimes – one with only the standard dynamic government budget constraint, and the other involving the golden rule of public finance. We demonstrate analytically that the optimal fiscal policy differs in the two budgetary regimes considered. We also analyse two cases within the second regime: one, where the ratio of current spending to tax revenues is parametrically given, and another, where this ratio is optimally chosen by the government.     

Debt Policy Rules in an Open Economy

In a small open economy model of endogenous growth with public capital accumulation, we examine the effects of a debt policy rule under which the government must reduce its debt–GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long‐run debt–GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).     

Public debt and welfare in a quantitative Schumpeterian growth model with incomplete markets

This paper quantifies the welfare effects of counterfactual public debt policies using an endogenous growth model with incomplete markets. The economy features public debt, Schumpeterian growth, infinitely-lived agents, uninsurable income risk, and discount factor heterogeneity. Two versions of the model are specified, one with households holding equity in the group of innovating firms. The model is calibrated to the U.S. economy to match the degree of wealth inequality, the share of R&D expenditure in GDP, the firms’ exit rate, the average growth rate, and other standard long-run targets. When comparing balanced growth paths, I find large welfare gains in equilibria characterized by governments accumulating public wealth. The result is robust to the mechanism used to generate a highly concentrated wealth (i.e., preference heterogeneity or “superstar” income shocks). Welfare effects decompositions show that level effects and growth effects reinforce each other. The responses of both the intermediate goods and their market conditions are key in explaining the large level effects. The version of the model without equity is computationally easier to solve, allowing to consider transitional dynamics. Taking into account the dynamic adjustment to the new long-run equilibrium, I show that the transitional welfare costs are not large enough to change the sign of the welfare effects stemming from a change in public debt. I find that eliminating public debt would lead to a 0.8% increase in welfare, while moving to a debt/GDP ratio of 100% would entail a welfare loss of 0.5%. A decomposition analysis shows that growth accounts for approximately 50% of the overall welfare effects.     

Economic Growth,Public Debt and Welfare: Comparing Three Budgetary Rules

Abstract. We present an endogenous growth model with externalities of capital and elastic labor supply where we allow for public debt and welfare‐enhancing public spending. We analyze different debt policies as regards convergence to a balanced growth path and their effects on long‐run growth and welfare. Three budgetary rules are considered: the balanced budget rule, a budgetary rule where debt grows in the long run but at a rate lower than the balanced growth rate and a rule where public debt grows at the same rate as all other economic variables but where it guarantees that the intertemporal budget constraint is fulfilled.     

Estimating Non‐Keynesian Effects for Japan

Is a fiscal stimulus effective? This classical question has received significant research attention since the collapse of the global financial services firm Lehman Brothers. Although most studies agree on the existence of Keynesian multiplier effects, several studies also demonstrate the existence of non‐Keynesian effects. What explains this lack of consensus in the literature? In this paper, we aim to bridge the two views by estimating a near‐vector autoregressive system that includes interaction terms of fiscal instruments, and the debt‐to‐gross domestic product (GDP) or the primary‐deficit‐to‐GDP ratios. Moreover, to embed the dynamics of the debt‐to‐GDP ratio in the analysis, we explicitly incorporate the government budget constraint. By computing and comparing the impulse response functions, we find Keynesian effects when fiscal conditions are sound, and non‐Keynesian effects when the primary deficit is large.     

政府债务会影响财政支出的乘数效应吗?—来自跨国面板数据的经验证据

文章在构建一个局部均衡模型的基础上,采用150个国家(地区)2000?2014年的面板数据,实证考察了政府债务对财政支出乘数效应的影响,得到了与理论预期一致的经验证据.结果表明:(1)政府债务会显著影响财政支出的乘数效应.随着政府债务水平的提高,财政支出的乘数效应趋于减弱.尤其是在克服内生性问题之后,这一结论仍然成立;(2)政府债务作用存在显著的非线性特征.当政府债务占GDP的比重突破88%的阈值后,财政支出的乘数效应会在低债务国家和高债务国家之间发生非常迅速的逆向转换;(3)对中国这样的低债务国家,顺周期的财政政策运用是非常有效的.而对美国、希腊等已经处于高债务水平的国家,采取逆周期的财政政策才能避免潜在的经济波动风险.     

REDISTRIBUTIVE POLITICS AND GOVERNMENT DEBT IN A BORROWING‐CONSTRAINED ECONOMY

We develop a two‐period, three‐class of income model where low‐income agents are borrowing constrained because of capital market imperfections, and where redistributive expenditure is financed by tax and government debt. When the degree of capital market imperfection is high, there is an ends‐against‐the‐middle equilibrium where the constrained low‐income and the unconstrained high‐income agents favour low levels of government debt and redistributive expenditure; these agents form a coalition against the middle. In this equilibrium, the levels of government debt and expenditure might be below the efficient levels, and the spread of income distribution results in a lower debt‐to‐GDP ratio.     

WHAT IT TAKES TO SOLVE THE U.S. GOVERNMENT DEFICIT PROBLEM

This paper uses a structural multi‐country macroeconometric model to estimate the size of the decrease in transfer payments (or tax expenditures) needed to stabilize the U.S. government debt/gross domestic product (GDP) ratio. It takes into account endogenous effects of changes in fiscal policy on the economy and in turn the effect of changes in the economy on the deficit. A base run is first obtained for the 2013:1–2022:4 period in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then transfer payments are decreased by an amount sufficient to stabilize the long‐run debt/GDP ratio. The results show that transfer payments need to be decreased by 2% of GDP from the base run, which over the 10 years is $3.2 trillion in 2005 dollars and $4.8 trillion in current dollars. The real output loss is 1.1% of baseline GDP. Monetary policy helps keep the loss down, but it is not powerful enough in the model to eliminate all of the loss. The estimates are robust to a base run with less inflation and to one with less expansion. (JEL E17)     

PUBLIC DEBT AND PUBLIC INVESTMENT IN AN ENDOGENOUS GROWTH MODEL WITH REAL WAGE RIGIDITIES

We present an endogenous growth model with public capital, public debt and real wage rigidities due to labor market imperfections. Assuming that the primary surplus relative to gross domestic produce (GDP) is a positive function of the debt to GDP ratio, we study growth and employment effects of deficit‐financed public investment using simulations as well as how fiscal policy affects stability of the economy. Further, we contrast the growth rate and the unemployment rate in the deficit scenario with that of the balanced budget scenario. Finally, we compare our results with those obtained in case of flexible wages and full employment.     

International coordination of debt rules with time-inconsistent voters

In this study, we investigate the international coordination of debt rules in an economy consisting of several countries with varying degrees of present bias. A case wherein each country sets its own uncoordinated debt rules is compared with a case wherein all countries have common coordinated debt rules. Countries with weak present-biased preferences increase their debt issuance and suffer from welfare losses by participating in coordination. In contrast, countries with strong present-biased preferences reduce their debt issuance and can enjoy welfare improvement by participating in coordination. The contrasting results suggest the possibility that countries with weak present-biased preferences have little incentive to follow the coordinated rule.     

Algeria: A three-sector macrofiscal model for debt sustainability and growth policy analysis

In this paper, we present a dynamic general equilibrium (DGE) model to address the macrofiscal vulnerabilities and the effects of fiscal policy on growth and employment in Algeria. We first discuss the baseline scenario over the period 2021–2040. According to our baseline results, without fundamental changes in fiscal policies, even relatively high growth will not be sufficient to put public debt on a sustainable path. We then conduct four experiments and assess their impact on fiscal accounts, growth, and unemployment: an increase in the efficiency of public spending on infrastructure investment, a gradual reduction in the share of noninterest government spending in GDP, the same gradual reduction in spending combined with a permanent increase in the share of investment in infrastructure in total noninterest government expenditure, and a composite fiscal reform program that combines these individual policies, respectively. The results suggest that public debt sustainability can be achieved, and growth and employment can be promoted, as long as an ambitious fiscal reform program involving tax, spending, and governance reforms is implemented. Importantly, our quantitative analysis shows that, with a well-designed fiscal program, there may be no trade-off between fiscal consolidation and economic growth.     

The consequences of an unknown debt target

Several proposals to reduce U.S. debt reveal large differences in their targets. We examine how an unknown debt target affects economic activity using a real business cycle model in which Bayesian households learn about a state-dependent debt target in an endogenous tax rule. Recent papers use stochastic volatility shocks to study fiscal uncertainty. In our setup, the fiscal rule is time-varying due to unknown changes in the debt target. Households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities. Three key findings emerge from our analysis: (1) limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates; (2) the welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households; (3) an unknown debt target likely reduced the stimulative effect of the ARRA and uncertainty about the sunset provision in the Bush tax cuts may have slowed the recovery and led to welfare losses.     

The golden rule of public finance and the composition of government expenditures: a growth and welfare analysis

This paper employs an endogenous growth model to study the growth and welfare effects of the golden rule of public finance. Two versions are compared, whereby government deficits are restricted for the use of public investments. It is shown that the growth effect of the golden rule depends on what kind of expenditure is adjusted to meet debt obligations. A transition from a balanced budget to a golden rule is performed to study welfare. The results indicate that a budget rule with detrimental growth effects can still have positive welfare implications, and vice versa, if the composition of government expenditures and transitional dynamics are taken into account.     

Federal fiscal transfer rules in monetary unions

This paper considers simple rules for federal fiscal transfers that automatically redistribute funds among member states of a monetary union to counteract adverse idiosyncratic shocks. The transfer rules target regional differences in nominal GDP, consumption spending, labor income, and fiscal deficits. Targeting regional fiscal deficits is the only rule that reduces consumption fluctuations and that promotes interregional consumption risk sharing, but the overall welfare effect is negative. In contrast, targeting regional differences in labor income yields the largest welfare gains, but it also yields the largest fluctuations in consumption and real GDP. It is demonstrated that the welfare gains primarily stem from reducing the allocative inefficiency of input factors caused by nominal rigidities. The optimal transfer rule essentially implies a combination of consumption spending and labor income targeting, and it primarily targets the allocative inefficiency of factor inputs at the cost of lower interregional consumption risk sharing.     

The Measurement of the Utilisation Efficiency of External Debt Funds and Its Influencing Factors

This paper uses stochastic frontier analysis to measure the utilisation efficiency of external debt funds, and identifies what factors actually influence the utilisation efficiency of external debt funds. Measurements show that in both developing and developed countries, the utilisation efficiency of external debt funds shows a downward trend; this downward trend is more obvious in developed countries. Empirical analysis found that the trade deficit rate, the trade openness, the ratio of fiscal revenue to gross domestic product (GDP), and the inflation rate have a significant negative effect on the utilisation efficiency of external debt funds. The ratio of money and quasi money (M2) to GDP, the ratio of the population aged 15–65 to total population, the ratio of industry value‐added to GDP, and the investment growth rate have a significant positive effect on the utilisation efficiency of external debt funds. Furthermore, under the condition of high ratio of the population aged 15–65 to total population, an increase in the ratio of the population aged 15–65 to total population will have a larger effect on improving the utilisation efficiency of external debt funds. Under the condition of high trade deficit rate, an increase in trade deficit rate will have a bigger effect on decreasing the utilisation efficiency of external debt funds.     

On the welfare implications of nominal GDP targeting

This paper examines the welfare implications of a nominal GDP growth targeting rule, a nominal GDP level targeting rule, and inflation targeting regime in a New Keynesian model featuring positive trend inflation, two measures of welfare, and both high and low growth environments. The paper finds that (i) in general, nominal GDP growth targeting dominates other rules with changes in all dimensions; (ii) nominal GDP growth targeting framework is superior to the level targeting regime for most scenarios; (iii) inflation targeting is preferred to nominal GDP level targeting regime, but to minimize short-run fluctuations, the latter is advantageous; (iv) nominal GDP level targeting may be desirable only in a low growth environment with both low inflation indexation and consumption equivalence criteria. The simulation results provide solid evidence to policy makers on the desirability of nominal GDP growth targeting.     

THE BEHAVIOR OF U.S. PUBLIC DEBT AND DEFICITS DURING THE GLOBAL FINANCIAL CRISIS

In this paper we test the sustainability of U.S. public debt for the period 1916–2012 by analyzing how the primary surplus to gross domestic product (GDP) responds to changes in the debt to GDP ratio in a time‐varying parameter model. Further, we determine the stationarity property of the debt/GDP ratio while accommodating possible breaks in the data caused by wars and economic crisis under both the null and alternative hypotheses of an endogenous unit root test. The results show that the U.S. public debt was sustainable until 2005 when the primary surplus to GDP reacted negatively to the debt/income ratio. This is further exacerbated during the global financial crisis when primary surpluses continued to fall with increased debt, thus jeopardizing the sustainability of fiscal policy. While the stationarity test shows that the U.S. fiscal debt/GDP ratio is sustainable, it fails to highlight the risk that its debt policy has been becoming unsustainable in recent years. (JEL H62, E62, C2)     

FISCAL SUSTAINABILITY OF JAPAN: A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM APPROACH

The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt‐to‐GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP.     

Political economy of taxation,debt ceilings,and growth

This study presents voting on policies, including labor and capital income taxes and public debt, in an overlapping-generations model with physical and human capital accumulation, and analyzes the effects of a debt ceiling on a government's policy formation and its impact on growth and welfare. The results show that the debt ceiling induces the government to shift the tax burdens from the older to younger generations, but stimulates physical capital accumulation and may increase public education expenditure, resulting in a higher growth rate. Alternatively, the debt ceiling is measured from the viewpoint of a benevolent planner and lowering the debt ceiling (i.e., tightening fiscal discipline) makes it possible for the government to approach the planner's allocation in an aging society.     

The debt brake of the German states: a faulty design?

The debt brake for German states, which demands that they are forbidden from taking up new net debt from 2020 onwards, has two major shortcomings. First, states do not have tax autonomy. In fiscal crises, they can only make adjustments to expenditure but not on the revenue side. Given the fact that most expenditure is—at least in the short term—predetermined by law, in such a crisis a balanced budget without new debt is hardly feasible. Second, the measure does not take into account that large investments, in particular in small regional units, can scarcely be financed by current expenditure. Thus, there is a high probability that at least some states will take up new net debt even after 2020 and, therefore, violate the rules of the debt brake.