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Fiscal Rules in a Monetary Economy: Implications for Growth and Welfare

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  • Tetsuo Ono

    (Graduate School of Economics, Osaka University)

Abstract

This study considers two fiscal rules, a debt rule that controls the debt-to- GDP ratio, and an expenditure rule that controls the expenditure-to-GDP ratio, in a monetary growth model with financial intermediation. Tightening fiscal rules promotes economic growth and thus benefits future generations. However, there could be two equilibria of the nominal interest rates, and the welfare effects of the rules on the current generation are different between the two equilibria. In particular, the effects of a decreased debt-to-GDP ratio depend on its initial ratio; a low (high) ratio country has an incentive (no incentive) to reduce the ratio further from the viewpoint of the current generation's welfare. This result offers a reason for difficulties with fiscal reform in countries with already high debt-to-GDP ratios.

Suggested Citation

  • Tetsuo Ono, 2018. "Fiscal Rules in a Monetary Economy: Implications for Growth and Welfare," Discussion Papers in Economics and Business 18-27, Osaka University, Graduate School of Economics.
  • Handle: RePEc:osk:wpaper:1827
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    More about this item

    Keywords

    Fiscal Rule; Government Debt; Economic Growth;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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