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An Opportunistic Approach to Debt Reduction

  • Patrick Georges

This paper analyses alternative fiscal policy rules that would be useful if the government wanted to establish goals for the evolution of the debt-to-GDP ratio over time. It also examines the fiscal policy trade off, that is, how fiscal policy, with this particular goal in mind, balances three objectives: debt control, commitment to announced tax and spending measures (in real terms), and economic stabilisation. Hostland and Matier (1999, 2001) have proposed a symmetric flexible rule whereby the fiscal authority aims to bring the debt-to-GDP ratio back on track at the same rate whether that ratio is above or below its target path. In this paper, we look at the potential advantages of waiting for the most opportune moments (when economic growth is strong) to reduce the debt burden. We refer to this asymmetric fiscal rule as an opportunistic approach to debt reduction. The main policy question of the paper is whether the opportunistic approach to debt reduction improves the fiscal policy trade off under a symmetric rule. We examine this issue by comparing symmetric and asymmetric fiscal policy rules in a stochastic simulation model. The intuition underlying an opportunistic approach seems compelling but upon closer examination there appears to be little in the way of an advantage (or disadvantage) relative to a symmetric rule. Both approaches trade-off the conflicting fiscal policy objectives in much the same way. We demonstrate this result by showing that the performance of an opportunistic approach can always be approximated by a carefully chosen symmetric fiscal policy rule. It is the fiscal authority’s freedom to choose the degree of flexibility of the symmetric fiscal rule that permits it to approximate the fiscal policy trade-off delivered by an opportunistic approach to debt reduction. Ce document analyse diverses règles de la politique fiscale qui seraient utiles si le gouvernement désirait établir des objectifs concernant l’évolution du ratio de la dette au PIB. Il examine aussi les compromis de la politique fiscale, c'est-à-dire comment la politique fiscale, compte tenu de cet objectif en particulier, assure un équilibre entre ces trois objectifs : le contrôle de la dette, l’engagement envers les mesures fiscales et les mesures de dépenses annoncées (en termes réels) et la stabilisation économique. Hostland et Matier (1999, 2001) ont proposé une règle souple symétrique selon laquelle les autorités financières visent à ramener le ratio de la dette au PIB sur la bonne voie au même taux, que le ratio soit supérieur ou inférieur à sa trajectoire cible. Dans ce document, nous nous penchons sur les avantages qu’il pourrait y avoir d’attendre les moments les plus opportuns (lorsque la croissance économique est forte) pour réduire le fardeau de la dette. Nous considérons cette règle fiscale asymétrique comme une approche opportuniste de la réduction de la dette. La principale question posée dans ce document est de savoir si l’approche opportuniste de la réduction de la dette améliore les compromis de la politique fiscale selon une règle symétrique. Nous examinons cette question en comparant les règles symétrique et asymétrique de la politique fiscale grâce à un modèle de simulation stochastique. L’intuition sous-tendant une approche opportuniste semble convaincante, mais après un examen plus approfondi, il semble y avoir peu d’avantages (ou d’inconvénients) par rapport à une règle symétrique. Les deux approches assurent des compromis entre les divers objectifs de la politique fiscale à peu près de la même façon. Nous démontrons ce résultat en soulignant que la performance d’une approche opportuniste peut toujours être établie approximativement grâce à une règle symétrique bien choisie de la politique fiscale. Les autorités financières sont libres de choisir le degré de souplesse de la règle fiscale symétrique qui lui permet de se rapprocher des compromis de la politique fiscale permis par une approche opportuniste de la réduction de la dette.

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Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2001-13.

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Handle: RePEc:fca:wpfnca:2001-13
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