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Debt Policy Rules in an Open Economy

Author

Listed:
  • Keiichi Morimoto

    () (Department of Economics, Meisei University)

  • Takeo Hori

    () (College of Economics, Aoyama Gakuin University)

  • Noritaka Maebayashi

    () (Faculty of Economics and Business Administration, The University of Kitakyushu)

  • Koichi Futagami

    () (Graduate School of Economics, Osaka University)

Abstract

In a small open economy model of endogenous growth with public capital accu- mulation, we examine the effects of a debt policy rule under which the government must reduce its debt-GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long run debt-GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).

Suggested Citation

  • Keiichi Morimoto & Takeo Hori & Noritaka Maebayashi & Koichi Futagami, 2013. "Debt Policy Rules in an Open Economy," Discussion Papers in Economics and Business 13-07-Rev., Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Aug 2015.
  • Handle: RePEc:osk:wpaper:1307r
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    References listed on IDEAS

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    Cited by:

    1. Koichi Futagami & Kunihiko Konishi, 2018. "Dynamic Analysis of Budget Policy Rules in Japan," Bank of Japan Working Paper Series 18-E-3, Bank of Japan.

    More about this item

    Keywords

    Fiscal policy; Public debt; Welfare; Small open economy; Indeterminacy; Limit cycles;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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