Fiscal discipline is commonly evaluated on the basis of the debt–gross domestic product ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper, we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onward for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.

The fallacy of fiscal discipline / Canofari, P; Piergallini, A; Piersanti, G. - In: MACROECONOMIC DYNAMICS. - ISSN 1365-1005. - 24:1(2020), pp. 55-68. [10.1017/S1365100518000317]

The fallacy of fiscal discipline

Canofari P;
2020

Abstract

Fiscal discipline is commonly evaluated on the basis of the debt–gross domestic product ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper, we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onward for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.
Financial Wealth; Fiscal Discipline; Sustainability Indicators; Economics and Econometrics
The fallacy of fiscal discipline / Canofari, P; Piergallini, A; Piersanti, G. - In: MACROECONOMIC DYNAMICS. - ISSN 1365-1005. - 24:1(2020), pp. 55-68. [10.1017/S1365100518000317]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/181614
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