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Fiscal sustainability using growth-maximizing debt targets

Author

Listed:
  • 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.

Suggested Citation

  • Cristina Checherita-Westphal & Andrew Hughes Hallett & Philipp Rother, 2014. "Fiscal sustainability using growth-maximizing debt targets," Applied Economics, Taylor & Francis Journals, vol. 46(6), pages 638-647, February.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:6:p:638-647
    DOI: 10.1080/00036846.2013.861590
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. EU-13 should spend more
      by Bruno Duarte in EUnomics on 2018-09-18 20:25:53

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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. repec:spr:cliomt:v:12:y:2018:i:2:d:10.1007_s11698-017-0159-8 is not listed on IDEAS
    3. 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.
    4. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2017. "Heterogeneity in the debt-growth nexus: Evidence from EMU countries," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 470-486.
    5. 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.
    6. 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.
    7. 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.
    8. Bettina Fincke & Alfred Greiner, 2016. "On the relation between public debt and economic growth: an empirical investigation," Economics and Business Letters, Oviedo University Press, vol. 4(4), pages 137-150.
    9. repec:kap:iecepo:v:15:y:2018:i:2:d:10.1007_s10368-017-0396-0 is not listed on IDEAS
    10. repec:eee:jmacro:v:55:y:2018:i:c:p:1-11 is not listed on IDEAS
    11. Robert Ambrisko & Vilma Dingova & Michal Dvorak & Dana Hajkova & Eva Hromadkova & Kamila Kulhava & Radka Stikova, 2017. "Assessing the Fiscal Sustainability of the Czech Republic," Research and Policy Notes 2017/02, Czech National Bank, Research Department.
    12. S. Menguy, 2014. "Which is the optimal fiscal rule in a monetary union? Targeting the structural, the global budgetary deficit, or the public debt?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-21, December.
    13. 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.
    14. Markus Ahlborn & Rainer Schweickert, 2018. "Public debt and economic growth – economic systems matter," International Economics and Economic Policy, Springer, vol. 15(2), pages 373-403, April.
    15. Isabelle Joumard & Peter Hoeller & Jean-Marc Fournier & Hermes Morgavi, 2017. "Public debt in India: Moving towards a prudent level?," OECD Economics Department Working Papers 1400, OECD Publishing.
    16. Falilou Fall & Debra Bloch & Jean-Marc Fournier & Peter Hoeller, 2015. "Prudent debt targets and fiscal frameworks," OECD Economic Policy Papers 15, OECD Publishing.
    17. 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.

    More about this item

    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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