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Government Debt, Budget Surplus, and Popularity of Politicians

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  • A. Prskawetz

    (Vienna University of Technology)

Abstract

This paper sets up a positive model of government behavior to determine the optimal fiscal policy of a politician who aims to reach a certain target level of national debt and remain popular at the same time. We model explicitly the response of the citizens to the fiscal policy set by the politician. To that end, we assume that citizens form an equilibrium acceptance rate of savings and adjust dynamically this savings rate to the currently prevailing levels of government debt and primary surplus. The difference between the equilibrium acceptance rate of savings as formed by the public and the fiscal policy actually chosen by the politician determines the politician popularity. Using the Pontryagin maximum principle, we derive the optimal level of the fiscal policy and investigate its local stability depending on the parameters of the model. We show that cyclical strategies [that is, phases of saving (primary surplus) and spending (primary deficit)], may be optimal.

Suggested Citation

  • A. Prskawetz, 1998. "Government Debt, Budget Surplus, and Popularity of Politicians," Journal of Optimization Theory and Applications, Springer, vol. 98(1), pages 131-149, July.
    • Handle: RePEc:spr:joptap:v:98:y:1998:i:1:d:10.1023_a:1022641015215
    DOI: 10.1023/A:1022641015215
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    References listed on IDEAS

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    1. Olivier J. Blanchard, 1991. "Current and Anticipated Deficits, Interest Rates and Economic Activity," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 361-390, National Bureau of Economic Research, Inc.
    2. William D. Nordhaus, 1975. "The Political Business Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(2), pages 169-190.
    3. Helmut Frisch & Franz X. Hof, 1996. "The Algebra of Government Debt," CESifo Working Paper Series 121, CESifo.
    4. Engelbert Dockner & Gustav Feichtinger, 1991. "On the optimality of limit cycles in dynamic economic systems," Journal of Economics, Springer, vol. 53(1), pages 31-50, February.
    5. Feichtinger, Gustav & Novak, Andreas & Wirl, Franz, 1994. "Limit cycles in intertemporal adjustment models : Theory and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 353-380, March.
    6. Feichtinger, Gustav & Wirl, Franz, 1991. "Politico-economic cycles of regulation and deregulation," European Journal of Political Economy, Elsevier, vol. 7(4), pages 469-485, November.
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    Cited by:

    1. Halkos, George E. & Papageorgiou, George J. & Halkos, Emmanuel G. & Papageorgiou, John G., 2020. "Public debt games with corruption and tax evasion," Economic Analysis and Policy, Elsevier, vol. 66(C), pages 250-261.

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