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Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions

Abstract

This paper investigates the relevance of the No-Ponzi game condition for public debt (i.e. the public debt growth rates has to be lower than the real interest rate, a necessary assumption for Ricardian equivalence) and of the transversality condition for the GDP growth rate (i.e. the GDP growth rate has to be lower than the real interest rate). First, on the unbalanced panel of 21 countries from 1961 to 2010 available in OECD database, those two conditions were simultaneously validated only for 29% of the cases under examination. Second, those two conditions were more frequent in the 1980s and the 1990s when monetary policies were more restrictive. Third, in tune with the Keynesian view, when the real interest rate is higher than the GDP growth, it corresponds to 75% of the cases of the increases of the debt/GDP ratio but to only 43% of the cases of the decreases of the debt/GDP ratio (fiscal consolidations).

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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 13042.

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Length: 20 pages
Date of creation: Apr 2013
Handle: RePEc:mse:cesdoc:13042
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Keywords: Government solvency; austerity; fiscal consolidation; No-Ponzi game condition; transversality condition; Keynesian countercyclical budgetary policy; monetary policy; economic growth.;

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Find related papers by JEL classification:
  • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
  • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • H6 - Public Economics - - National Budget, Deficit, and Debt
  • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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