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Fiscal sustainability under entitlement spending

Author

Listed:
  • Floriana Cerniglia
  • Enzo Dia
  • Andrew Hughes Hallett

Abstract

We develop a simple theoretical framework that can be used not only to assess the stability of debt, but also to evaluate the sustainability of the commitments of the public sector in the presence of entitlement spending. We model the optimal intertemporal path of fiscal variables and the optimal policy responses in this environment, which requires a dynamic framework. Our analysis suggests that even with near-zero interest rates the stability of debt is not guaranteed and that the sustainability of public finances depends on the level of taxes and the persistence of expenditure, as much as on the level of debt. We estimate the model with panel data techniques, finding that our modelling strategy is supported by the empirical evidence and we use calibrated versions of our model to compare different countries.

Suggested Citation

  • Floriana Cerniglia & Enzo Dia & Andrew Hughes Hallett, 2021. "Fiscal sustainability under entitlement spending," Oxford Economic Papers, Oxford University Press, vol. 73(3), pages 1175-1199.
    • Handle: RePEc:oup:oxecpp:v:73:y:2021:i:3:p:1175-1199.
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    File URL: http://hdl.handle.net/10.1093/oep/gpaa049
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    Citations

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    Cited by:

    1. Afonso, António & Coelho, José Carlos, 2023. "Public finances solvency in the Euro Area," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 642-657.

    More about this item

    Keywords

    E62; H53; H63; I38;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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