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Fiscal sustainability using growth-maximizing debt targets

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Listed author(s):
  • Cristina Checherita-Westphal
  • Andrew Hughes Hallett
  • Philipp Rother

Abstract

This article highlights the importance of debt-related fiscal rules and derives growth-maximizing public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should maintain if they wish to maximize growth for panels of OECD, EU and euro area countries. These are not arbitrary numbers, but are founded on long-run optimizing behaviour assuming that governments implement the golden rule of financing; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15% points lower than the estimate for the growth-maximizing debt ratio in our OECD sample and comfortably within the Stability and Growth Pact's debt ceiling of 60% of GDP. We also indicate how forward-looking budget reaction functions fit into a debt targeting framework.

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File URL: http://hdl.handle.net/10.1080/00036846.2013.861590
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 46 (2014)
Issue (Month): 6 (February)
Pages: 638-647

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Handle: RePEc:taf:applec:v:46:y:2014:i:6:p:638-647
DOI: 10.1080/00036846.2013.861590
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Find related papers by JEL classification:
  • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
  • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
  • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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Cited by:

  1. Jean-Marc Fournier, 2016. "The Positive Effect of Public Investment on Potential Growth," OECD Economics Department Working Papers 1347, OECD Publishing.
  2. Ugo Panizza & Andrea F. Presbitero, 2013. "Public Debt and Economic Growth in Advanced Economies: A Survey," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 149(II), pages 175-204, June.
  3. Ahlborn, Markus & Schweickert, Rainer, 2015. "Public debt and economic growth: Economic systems matter," PFH Forschungspapiere/Research Papers 2015/02, PFH Private University of Applied Sciences, Göttingen.
  4. Alfred Greiner, 2015. "Public Debt, Productive Public Spending and Endogenous Growth," The Japanese Economic Review, Japanese Economic Association, vol. 66(4), pages 520-535, December.
  5. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2017. "Heterogeneity in the debt-growth nexus: Evidence from EMU countries," IREA Working Papers 201706, University of Barcelona, Research Institute of Applied Economics, revised Mar 2017.
  6. Gábor Kutasi, 2017. "Unsustainable Public Debt in a European Fiscal Union?," REVISTA FINANZAS Y POLÍTICA ECONÓMICA, UNIVERSIDAD CATOLICA DE COLOMBIA, vol. 9(1), pages 25-39, February.
  7. Enrique R. Casares, 2015. "A relationship between external public debt and economic growth," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 30(2), pages 219-243.
  8. Falilou Fall & Debra Bloch & Jean-Marc Fournier & Peter Hoeller, 2015. "Prudent debt targets and fiscal frameworks," OECD Economic Policy Papers 15, OECD Publishing.
  9. Ahlborn, Markus & Schweickert, Rainer, 2016. "Public debt and economic growth: Economic systems matter," Center for European, Governance and Economic Development Research Discussion Papers 281, University of Goettingen, Department of Economics.
  10. Kourtellos, Andros & Stengos, Thanasis & Tan, Chih Ming, 2013. "The effect of public debt on growth in multiple regimes," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 35-43.
  11. Zixi Liu, 2015. "Do debt and growth dance together? A DSGE model of a small open economy with sovereign debt," Working Papers 2015.05, International Network for Economic Research - INFER.

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