Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153010
Authors: 
Michel, Philippe
von Thadden, Leopold
Vidal, Jean-Pierre
Year of Publication: 
2006
Series/Report no.: 
ECB Working Paper 576
Abstract: 
Unstable government debt dynamics can typically be corrected by various fiscal instruments, like appropriate adjustments in government spending, public transfers, or taxes. This paper investigates properties of state-contingent debt targeting rules which link stabilizing budgetary adjustments around a target level of long-run debt to the state of the economy. The paper establishes that the size of steady-state debt is a key determinant of whether it is possible to find a rule of this type which can be implemented under all available fiscal instruments. Specifically, considering linear feedback rules, the paper demonstrates that there may well exist a critical level of debt beyond which this is no longer possible. From an applied perspective, this finding is of particular relevance in the context of a monetary union with decentralized fiscal policies. Depending on the level of long-run debt, there might be a conflict between a common fiscal framework which tracks deficit developments as a function of the state of the economy and the unrestricted choice of fiscal policy instruments at the national level.
Subjects: 
fiscal regimes
overlapping generations
JEL: 
E63
H62
Document Type: 
Working Paper

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