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The Peril of Fiscal Rules

Author

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  • Maxime Menuet

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique)

  • Alexandru Minea

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique)

  • Patrick Villieu

    (LEO - Laboratoire d'Économie d'Orleans [FRE2014] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper develops a limit-cycle-based theory of debt fluctuations through a simple endogenous growth model. Public debt and deficit are introduced by relaxing the balanced-budget rule hypothesis, and assuming a simple fiscal rule. Our main result is that fiscal rules can be destabilizing, leading to (i) multiple equilibria-four balanced-growth paths can emerge-, (ii) endogenous public debt cycles, which appear both in the short and the long run, and (iii) hysteresis phenomena arising from extreme sensitivity of changes in parameters. We also reveal that a balanced-budget rule does not preclude large aggregate fluctuations. Finally, our calibration exercise highlights that our model produces asymmetric cycles consistent with observed stylized facts.
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  • Maxime Menuet & Alexandru Minea & Patrick Villieu, 2019. "The Peril of Fiscal Rules," Post-Print hal-02314996, HAL.
    • Handle: RePEc:hal:journl:hal-02314996
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