Fiscal sustainability using growth-maximising debt targets
This paper highlights the importance of debt-related fiscal rules and derives growth-maximising 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 try to maintain if they wish to maximise growth for panels of OECD, EU and euro area countries, respectively. These are not arbitrary numbers, as many of the fiscal rules in the literature suggest, but are founded on long-run optimising behaviour, assuming that governments implement the so-called golden rule over the cycle; 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 percentage points lower than the estimate for the growth-maximising 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. JEL Classification: H63, E22, O40
|Date of creation:||Sep 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Hughes Hallett & Rasmus Kattai & John Lewis, 2012. "How Reliable Are Cyclically Adjusted Budget Balances In Real Time?," Contemporary Economic Policy, Western Economic Association International, vol. 30(1), pages 75-92, 01.
- Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2013.
"Debt and growth: New evidence for the euro area,"
Journal of International Money and Finance,
Elsevier, vol. 32(C), pages 809-821.
- Pedro R. D. Bom & Jenny Ligthart, 2008.
"How Productive is Public Capital? A Meta-Analysis,"
CESifo Working Paper Series
2206, CESifo Group Munich.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2010.
"Growth in a Time of Debt,"
NBER Working Papers
15639, National Bureau of Economic Research, Inc.
- Pesaran, M.H. & Smith, R., 1992.
"Estimating Long-Run Relationships From Dynamic Heterogeneous Panels,"
Cambridge Working Papers in Economics
9215, Faculty of Economics, University of Cambridge.
- Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
- Christophe Kamps, 2006.
"New Estimates of Government Net Capital Stocks for 22 OECD Countries, 1960-2001,"
IMF Staff Papers,
Palgrave Macmillan, vol. 53(1), pages 6.
- Christophe Kamps, 2005. "New Estimates of Government Net Capital Stocks for 22 OECD Countries 1960-2001," Public Economics 0506015, EconWPA.
- Christophe Kamps, 2004. "New Estimates of Government Net Capital Stocks for 22 OECD Countries 1960-2001," IMF Working Papers 04/67, International Monetary Fund.
- Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, vol. 23, pages 297-362, 04.
- Andreas Stephan, 2001.
"Regional Infrastructure Policy and its Impact on Productivity: A Comparison of Germany and France,"
CIG Working Papers
FS IV 01-02, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Stephanie Aubert & Andreas Stephan, 2000. "Regional Infrastructure Policy and its Impact on Productivity: A Comparison of Germany and France," CIG Working Papers FS IV 00-02, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- César Calderón & Enrique Moral‐Benito & Luis Servén, 2015.
"Is infrastructure capital productive? A dynamic heterogeneous approach,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 30(2), pages 177-198, 03.
- Calderon, Cesar & Moral-Benito, Enrique & Serven, Luis, 2011. "Is infrastructure capital productive ? a dynamic heterogeneous approach," Policy Research Working Paper Series 5682, The World Bank.
- César Calderón & Enrique Moral-Benito & Luis Servén, 2011. "Is infrastructure capital productive? A dynamic heterogeneous approach," Banco de Espa�a Working Papers 1103, Banco de Espa�a.
- Colin Vance, 2006. "Marginal Effects and Significance Testing with Heckman’s Sample Selection Model: A Methodological Note," RWI Discussion Papers 0039, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
- Pasaran, M.H. & Im, K.S. & Shin, Y., 1995.
"Testing for Unit Roots in Heterogeneous Panels,"
Cambridge Working Papers in Economics
9526, Faculty of Economics, University of Cambridge.
- Ward Romp & Jakob de Haan, 2007.
"Public Capital and Economic Growth: A Critical Survey,"
Perspektiven der Wirtschaftspolitik,
Verein für Socialpolitik, vol. 8(s1), pages 6-52, 04.
- Romp, Ward & de Haan, Jakob, 2005. "Public capital and economic growth: a critical survey," EIB Papers 2/2005, European Investment Bank, Economics Department.
- Marco Buti & Jo�o Nogueira Martins & Alessandro Turrini, 2007.
"From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules,"
CESifo Economic Studies,
CESifo, vol. 53(1), pages 115-152, March.
- Buti, Marco & Martins, Joao Nogueira & Turrini, Alessandro Antonio, 2006. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CEPR Discussion Papers 5809, C.E.P.R. Discussion Papers.
- Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013.
"Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies,"
Royal Economic Society, vol. 0, pages F4-F30, 02.
- Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," NBER Working Papers 16782, National Bureau of Economic Research, Inc.
- Rafael E. De Hoyos & Vasilis Sarafidis, 2006. "Testing for cross-sectional dependence in panel-data models," Stata Journal, StataCorp LP, vol. 6(4), pages 482-496, December.
- Charlot, Sylvie & Schmitt, Bertrand, 1999. "Public Infrastructure and Economic Growth in France's Regions," ERSA conference papers ersa99pa142, European Regional Science Association.
- Edward F. Blackburne III & Mark W. Frank, 2007. "Estimation of nonstationary heterogeneous panels," Stata Journal, StataCorp LP, vol. 7(2), pages 197-208, June.
- Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
- Kamps, Christophe, 2005. "Is there a lack of public capital in the European Union?," EIB Papers 3/2005, European Investment Bank, Economics Department.
- Damiaan Persyn & Joakim Westerlund, 2008. "Error-correction–based cointegration tests for panel data," Stata Journal, StataCorp LP, vol. 8(2), pages 232-241, June.
- Salmon, Mark, 1982.
"Error Correction Mechanisms,"
The Warwick Economics Research Paper Series (TWERPS)
199, University of Warwick, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20121472. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications)
If references are entirely missing, you can add them using this form.