Working Paper: CEPR ID: DP6897
Authors: Marcos Poplawski Ribeiro; Roel Beetsma; Andreas Schabert
Abstract: This paper compares constraints on the public debt with constraints on the primary deficit. The analysis takes into account how an optimizing government reacts to the different constraints when deciding on a spending and borrowing plan. We find that the economy behaves similarly under both constraints, although for our benchmark calibration welfare is higher under the debt constraint. Further, the debt constraint is more robust against changes in the interest rate. Our results lend support to the enhanced focus on the public debt after the recent reform of the Stability and Growth Pact.
Keywords: Fiscal constraints; Myopia; Social welfare; Stability and Growth Pact
JEL Codes: E62; H30; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Constraints on public debt and primary deficits (H68) | different fiscal behaviors from governments (H39) |
| debt constraint (H60) | more precautionary fiscal behavior (E62) |
| primary-deficit constraint (H60) | increase debt levels to maintain primary surpluses (H63) |
| myopic government (H11) | higher average debt under primary-deficit constraint (H69) |
| myopic government (H11) | lower average debt under debt constraint (H60) |
| debt constraint (H60) | more robust to changes in interest rates (E43) |
| increase in income persistence (D15) | primary-deficit constraint more attractive (D10) |