Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87157
Authors: 
van Wijnbergen, Sweder
France, Alexander
Year of Publication: 
2012
Series/Report no.: 
Tinbergen Institute Discussion Paper 12-011/2
Abstract: 
When debt levels approach critical levels, tax payers may revolt against the associated debtservice burden. Funding problems may arise in capital markets when lenders anticipate such revolts and refuse to participate in debt auctions. We provide a stochastic framework to assess whether such problems may arise and argue that the key to fiscal sustainability in a stochastic environment is a feedback rule from debt level shocks back to corresponding adjustments in the primary surplus. We show that such feedback rules narrow future distributions of debt-output ratios and so reduce crisis probabilities. We apply the methodology to Dutch debt and deficit data spanning two centuries. Our results strongly argue for the incorporation of rules stipulating tightening fiscal policy whenever debt stocks exceed previously agreed upon targets (like in the original Eurozone Stability pact).
Subjects: 
deficits
debt sustainability
fiscal rules
JEL: 
E62
H62
H63
H68
Document Type: 
Working Paper

Files in This Item:
File
Size
263.05 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.