IDEAS home Printed from https://ideas.repec.org/p/mib/wpaper/351.html
   My bibliography  Save this paper

Debt stability under entitlement spending

Author

Listed:
  • Floriana, Cerniglia
  • Enzo, Dia
  • Andrew, Hughes Hallett

Abstract

Economists have traditionally used a simple rule that restricts primary deficits to less than a threshold given by the interest rate-growth rate differential and existing debt level to judge fiscal sustainability. This rule derives from a single period application of the government's budget constraint. It does not allow for the predictable dynamic effects of spending liabilities, such as entitlement spending. In this paper, we derive the equivalent dynamic rule for this case. It still depends on the interest-growth rate differential, but now includes a restriction on spending growth in relation to income growth. Several new results emerge. Debt remains stable; but the rate of convergence to stability varies with different parameters. And the growth in spending has to be less than a damping factor that controls convergence. This puts a limit on spending growth. To penalize the use of unpopular taxes further limits debt and the incentive to use debt finance.

Suggested Citation

  • Floriana, Cerniglia & Enzo, Dia & Andrew, Hughes Hallett, 2016. "Debt stability under entitlement spending," Working Papers 351, University of Milano-Bicocca, Department of Economics, revised 07 Oct 2016.
  • Handle: RePEc:mib:wpaper:351
    as

    Download full text from publisher

    File URL: http://repec.dems.unimib.it/repec/pdf/mibwpaper351.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fabrizio Coricelli & Riccardo Fiorito, 2013. "Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure," Documents de travail du Centre d'Economie de la Sorbonne 13033, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    2. 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," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    3. Hughes Hallett, A. J., 1979. "Computing revealed preferences and limits to the validity of quadratic objective functions for policy optimization," Economics Letters, Elsevier, vol. 2(1), pages 27-32.
    4. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
    5. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    6. Fisher, P. G. & Hallett, A. J. Hughes, 1988. "Efficient solution techniques for linear and non-linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 12(4), pages 635-657, November.
    7. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
    8. Alan J. Auerbach, 2009. "Long-Term Objectives for Government Debt," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(4), pages 472-501, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Casalin, Fabrizio & Dia, Enzo & Hughes Hallett, Andrew, 2020. "Public debt dynamics with tax revenue constraints," Economic Modelling, Elsevier, vol. 90(C), pages 501-515.
    2. Floriana Cerniglia & Enzo Dia & Andrew Hughes Hallett, 2019. "Tax vs. Debt Management Under Entitlement Spending: a Multicountry Study," Open Economies Review, Springer, vol. 30(3), pages 425-443, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Floriana Cerniglia & Enzo Dia & Andrew Hughes Hallett, 2019. "Tax vs. Debt Management Under Entitlement Spending: a Multicountry Study," Open Economies Review, Springer, vol. 30(3), pages 425-443, July.
    2. Floriana Cerniglia - Enzo Dia - Andrew Hughes Hallett, 2018. "Fiscal sustainability vs. fiscal stability: tax and debt under entitlement spending," CRANEC - Working Papers del Centro di Ricerche in Analisi economica e sviluppo economico internazionale crn1801, Università Cattolica del Sacro Cuore, Centro di Ricerche in Analisi economica e sviluppo economico internazionale (CRANEC).
    3. Casalin, Fabrizio & Dia, Enzo & Hughes Hallett, Andrew, 2020. "Public debt dynamics with tax revenue constraints," Economic Modelling, Elsevier, vol. 90(C), pages 501-515.
    4. Panizza, Ugo & Fatás, Antonio & Ghosh, Atish R. & ,, 2019. "The Motives to Borrow," CEPR Discussion Papers 13735, C.E.P.R. Discussion Papers.
    5. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2017. "Fiscal Policy and Debt Management with Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 132(2), pages 617-663.
    6. Markus Reischmann, 2016. "Empirical Studies on Public Debt and Fiscal Transfers," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 63.
    7. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    8. Lagadec, Gael & Descombels, Alain, 2009. "L'ombre de la crise [The shadow of the global crisis]," MPRA Paper 17871, University Library of Munich, Germany.
    9. Christopher Sleet, 2004. "Optimal Taxation with Private Government Information," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1217-1239.
    10. Yasushi Iwamoto, 2005. "Interaction between Monetary and Fiscal Policy and the Policy Mix, Theoretical Consideration and Japanese Experience," CARF F-Series CARF-F-043, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    11. Reinhart, Carmen M. & Reinhart, Vincent & Rogoff, Kenneth, 2015. "Dealing with debt," Journal of International Economics, Elsevier, vol. 96(S1), pages 43-55.
    12. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    13. Ghada Abbas, 2006. "Gestion de la dette publique et lissage des taux d’imposition," CAE Working Papers 46, Aix-Marseille Université, CERGAM.
    14. Ilzetzki, Ethan, 2023. "Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth," CEPR Discussion Papers 17803, C.E.P.R. Discussion Papers.
    15. Simón Sosvilla-Rivero & Marta Gómez-Puig, 2016. "“Debt-growth linkages in EMU across countries and time horizons”," IREA Working Papers 201610, University of Barcelona, Research Institute of Applied Economics, revised Apr 2016.
    16. Malte Rengel, 2020. "Sustainability of European fiscal balances: Just a statistical artifact?," Empirical Economics, Springer, vol. 58(4), pages 1681-1712, April.
    17. Luo, Yulei & Nie, Jun & Young, Eric R., 2014. "Model uncertainty and intertemporal tax smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 289-314.
    18. Lassila, Jukka & Valkonen, Timo, 2008. "Population ageing and fiscal sustainability in Finland : a stochastic analysis," Research Discussion Papers 28/2008, Bank of Finland.
    19. Bohn, Henning, 2001. "Retirement Savings in an Aging Society: A Case for Innovative Government Debt Management," University of California at Santa Barbara, Economics Working Paper Series qt59r83559, Department of Economics, UC Santa Barbara.
    20. Ricardo J. Caballero & Pierre Yared, 2008. "Inflating the Beast: Political Incentives Under Uncertainty," NBER Working Papers 13779, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Sustainable public debt; primary de cit rules; scal space.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mib:wpaper:351. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Matteo Pelagatti (email available below). General contact details of provider: https://edirc.repec.org/data/dpmibit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.