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Government expenditure ceiling and public debt dynamics in a demand-led macromodel

Author

Listed:
  • Rafael S. M. Ribeiro

    (Federal University of Minas Gerais)

  • Gilberto Tadeu Lima

    (University of São Paulo)

Abstract

This article explores some aspects of the debate about the efficacy of a fiscal rule that sets a government expenditure ceiling for the stabilisation of the public debt-to-output ratio. We develop a demand-led macromodel that assumes a closed economy operating with excess capacity and show that a fiscal rule that sets a limit for government spending, excluding the payment of interests, may not ensure a non-explosive trajectory of the public debt-to-output ratio. Our model allows us to map out different outcomes in terms of the stabilisation of the public debt stemming from the process of fiscal consolidation and conclude that the commitment of the fiscal authority to comply with the ceiling by cutting government spending is less likely to stabilise the public debt-to-output ratio in economies enduring excessively high interest rates accompanied by more regressive taxation systems. Our model also suggests that a more progressive tax structure may increase the likelihood of public debt stabilisation in the long run.

Suggested Citation

  • Rafael S. M. Ribeiro & Gilberto Tadeu Lima, 2018. "Government expenditure ceiling and public debt dynamics in a demand-led macromodel," Textos para Discussão Cedeplar-UFMG 573, Cedeplar, Universidade Federal de Minas Gerais.
    • Handle: RePEc:cdp:texdis:td573
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    File URL: https://www.cedeplar.ufmg.br/pesquisas/td/TD%20573.pdf
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    Cited by:

    1. Bischi, Gian Italo & Giombini, Germana & Travaglini, Giuseppe, 2022. "Monetary and fiscal policy in a nonlinear model of public debt," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 397-409.
    2. Almeida, Renan P. & Hungaro, Lucas, 2021. "Water and sanitation governance between austerity and financialization," Utilities Policy, Elsevier, vol. 71(C).
    3. Parui, Pintu, 2020. "Fiscal Expansion, Government Debt and Economic Growth: A Post-Keynesian Perspective," MPRA Paper 102740, University Library of Munich, Germany.
    4. Stefano di Bucchianico, 2019. "A bit of Keynesian debt-to-GDP arithmetic for deficit-capped countries," Bulletin of Political Economy, Bulletin of Political Economy, vol. 13(1), pages 55-83, June.
    5. Hiroshi Nishi & Kazuhiro Okuma, 2023. "Social common capital accumulation and fiscal sustainability in a wage-led growth economy," Working Papers PKWP2305, Post Keynesian Economics Society (PKES).

    More about this item

    Keywords

    Fiscal policy; expenditure ceiling; growth; public debt stability; income distribution.;
    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
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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