Fiscal sustainability using growth-maximising debt targets

Cristina Checherita-Westphal, Philipp Rother and Andrew Hughes Hallett
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

No 1472, Working Paper Series from European Central Bank

Abstract: This paper highlights the importance of debt-related fiscal rules and derives growth-maximising public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should try to maintain if they wish to maximise growth for panels of OECD, EU and euro area countries, respectively. These are not arbitrary numbers, as many of the fiscal rules in the literature suggest, but are founded on long-run optimising behaviour, assuming that governments implement the so-called golden rule over the cycle; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15 percentage points lower than the estimate for the growth-maximising debt ratio in our OECD sample and comfortably within the Stability and Growth Pact's debt ceiling of 60% of GDP. We also indicate how forward looking budget reaction functions fit into a debt targeting framework. JEL Classification: H63, E22, O40

Keywords: economic growth; public capital; public debt (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-pbe
Note: 1790315
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: Fiscal sustainability using growth-maximizing debt targets (2014)
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