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Fiscal Sustainability and Fiscal Soundness

  • Haizhou Huang
  • Danyang Xie

This paper tackles fiscal sustainability and fiscal soundness. In contrast to the existing literature, our analysis is in a general equilibrium framework. We obtain three results. First, we endogenize growth rate and interest rate, the two key rates for any study of fiscal sustainability; second, we illustrate that fiscal sustainability in general equilibrium should not be measured by a one-dimension indicator, e.g., debt-to-GDP ratio as in conventional studies, rather it is a line¡ªa fiscal sustainability frontier¡ªin two dimensions, namely, debt-to-GDP ratio and expenditure-to-GDP ratio; third, we obtain a novel and useful index of aggregate fiscal soundness.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 9 (2008)
Issue (Month): 2 (November)
Pages: 239-251

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Handle: RePEc:cuf:journl:y:2008:v:9:i:2:p:239-251
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  9. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, vol. 39(3-4), pages 771-779, April.
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  12. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  13. Saint-Paul, G., 1991. "Fiscal Policy In An Endogenous Growth Model," DELTA Working Papers 91-04, DELTA (Ecole normale supérieure).
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  15. Shantayanan Devarajan & Danyang Xie & Heng-Fu Zou, 2002. "Should Public Capital Be Subsidized or Provided?," Macroeconomics 0212005, EconWPA.
  16. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  17. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  18. George Kopits, 2001. "Fiscal Rules; Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 01/145, International Monetary Fund.
  19. Chamley, Christophe, 1985. "Efficient Taxation in a Stylized Model of Intertemporal General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 451-68, June.
  20. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
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  23. Xie, Danyang, 1991. "Increasing Returns and Increasing Rates of Growth," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 429-35, April.
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