Sustainable Fiscal Policy with Rising Public Debt-To-Gdp Ratios
In financial and economic policy circles concerned with public debt in developing countries, a rising debt-GDP ratio is interpreted as a signal of overborrowing, warning of debt defaults if strong fiscal corrections are not adopted in time. This paper shows why this interpretation is incorrect by building a simple model of fiscal policy in which upward-sloping debt paths are observed even though the probability of default is ``almost surely" equal to zero.
|Date of creation:||27 Nov 2006|
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