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Public Debt Frontier. A toolkit for analyzing fiscal policy and debt sustainability

Author

Listed:
  • Gonzalo F. de-Córdoba

    (University of Malaga, Spain)

  • Benedetto Molinari

    () (University of Malaga, Spain; Rimini Centre for Economic Analysis)

  • José L. Torres

    (University of Malaga, Spain)

Abstract

This paper provides a twofold contribution. First, it proposes a synthetic and visual indicator to assess public debt sustainability. This indicator summarizes in a single diagram the linkage between economic activity, government’s budget, and the maximum amount of public debt that is sustainable in the long run. The backing theory is a neoclassical growth model augmented with endogenous tax revenues, disaggregated public spending, different production technologies for public and private goods, non-atomistic wage setters in public labor (unions), and a fully specified maturity curve for public bonds. The second contribution of the paper is to develop and present a stand-alone software that analyzes public debt sustainability in response to variations of fiscal policy. This toolkit is useful for managing public debt or to place an additional constraint on government’s budget. We provide an example of its usage for the emblematic case of Greece during the last public debt crisis.

Suggested Citation

  • Gonzalo F. de-Córdoba & Benedetto Molinari & José L. Torres, 2018. "Public Debt Frontier. A toolkit for analyzing fiscal policy and debt sustainability," Working Paper series 18-36, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:18-36
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    References listed on IDEAS

    as
    1. Gonzalo Fernández-de-Córdoba & Javier Pérez & José Torres, 2012. "Public and private sector wages interactions in a general equilibrium model," Public Choice, Springer, vol. 150(1), pages 309-326, January.
    2. Juan Carlos Conesa & Timothy J. Kehoe, 2017. "Gambling for redemption and self-fulfilling debt crises," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 707-740, December.
    3. J. H. Ko, 2015. "Does an active fiscal policy work under a high level of government debt?," Applied Economics Letters, Taylor & Francis Journals, vol. 22(13), pages 1083-1088, September.
    4. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Maturity, Indebtedness, and Default Risk," American Economic Review, American Economic Association, vol. 102(6), pages 2674-2699, October.
    5. Reinhart, Carmen M. & Reinhart, Vincent & Rogoff, Kenneth, 2015. "Dealing with debt," Journal of International Economics, Elsevier, vol. 96(S1), pages 43-55.
      • Carmen M. Reinhart & Vincent Reinhart & Kenneth Rogoff, 2014. "Dealing with Debt," NBER Chapters,in: NBER International Seminar on Macroeconomics 2014, pages 43-55 National Bureau of Economic Research, Inc.
    6. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    7. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    8. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
    9. Daniela Schwarzer, 2015. "Building the euro area's debt crisis management capacity with the IMF," Review of International Political Economy, Taylor & Francis Journals, vol. 22(3), pages 599-625, June.
    10. Ardagna, Silvia, 2007. "Fiscal policy in unionized labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1498-1534, May.
    11. Cristina Arellano & Juan Carlos Conesa & Timothy J. Kehoe, 2012. "Chronic sovereign debt crises in the Eurozone, 2010-2012," Economic Policy Paper 12-4, Federal Reserve Bank of Minneapolis.
    12. Chamley Christophe P & Pinto Brian, 2011. "Why Official Bailouts Tend Not To Work: An Example Motivated by Greece 2010," The Economists' Voice, De Gruyter, vol. 8(1), pages 1-5, February.
    13. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
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    More about this item

    Keywords

    Fiscal policy; Public debt sustainability; Endogenous Tax revenues; DSGE model; Debt-dependent government spending; Python;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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