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The Perils of Fiscal Rules

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  • Maxime MENUET
  • Alexandru MINEA

    ()

  • Patrick VILLIEU

    ()

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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Suggested Citation

  • Maxime MENUET & Alexandru MINEA & Patrick VILLIEU, 2019. "The Perils of Fiscal Rules," LEO Working Papers / DR LEO 2702, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
  • Handle: RePEc:leo:wpaper:2702
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    Keywords

    ; Fiscal rules; Indeterminacy; Limit cycle; Public Debt; Bifurcation;

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