Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-24T05:21:42.475Z Has data issue: false hasContentIssue false
  • English
  • Français

THE FALLACY OF FISCAL DISCIPLINE

Published online by Cambridge University Press:  12 July 2018

Paolo Canofari ,
Alessandro Piergallini  and
Giovanni Piersanti
Paolo Canofari*
Affiliation:
LUISS School of European Political Economy
Alessandro Piergallini
Affiliation:
University of Rome Tor Vergata
Giovanni Piersanti
Affiliation:
University of Teramo
*
Address correspondence to: Paolo Canofari, LUISS School of European Political Economy, Via di Villa Emiliani 14, 00197 Rome, Italy; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Fiscal discipline is commonly evaluated on the basis of the debt–gross domestic product ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper, we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onward for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.

Keywords

Fiscal DisciplineFinancial WealthSustainability Indicators
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Special Issue 1: Macroeconomic Modeling and Empirical Evidence in the Wake of the Crisis , January 2020 , pp. 55 - 68
Copyright
© Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are very grateful to an anonymous referee for many excellent comments and suggestions. We would like to express our deep thanks to Giancarlo Marini for invaluable discussions on this line of enquiry. We also wish to thank Fabrizio Balassone, Patrizio Tirelli, and participants to the International Conference on “Economics, Economic Policies and Sustainable Growth in the Wake of the Crisis,” Università Politecnica delle Marche, Ancona, September 8–10, 2016, the Conference on “Present and Future of the EU and EMU: Debts, Deficits, and Related Institutional Designs,” Sapienza University of Rome, December 2–3, 2016, the XXIX Villa Mondragone International Economic Seminar on “Getting Globalization Right. Sustainability and Inclusive Growth in the post-Brexit Age,” Tor Vergata University Economics Foundation, June 21–22, 2017, the World Finance Conference, University of Cagliari, July 26–28, 2017, and the Conference on “Fiscal Policy Decisions for 2017. Impacts and Evaluations,” Roma Tre University, October 19, 2017, for very helpful comments and remarks. The usual disclaimers apply.

References

Aizenman, J. and Jinjarak, Y. (2010) De facto Fiscal Space and Fiscal Stimulus: Definition and Assessment. NBER working paper 16539.CrossRefGoogle Scholar
Arrow, K., Dasgupta, P., Goulder, L., Daily, G., Ehrlich, P., Heal, G., Lewis, S., Mäller, K. G., Schneider, S., Starrett, D., and Wlaker, B. (2004) Are we consuming too much? Journal of Economic Perspectives 18 (3), 147–172.CrossRefGoogle Scholar
Azzimonti, M., De Francisco, E., and Quadrini, V. (2014) Financial globalization, inequality, and the rising public debt. American Economic Review 104 (8), 2267–2302.CrossRefGoogle Scholar
Balassone, F. and Franco, D. (2000) Assessing fiscal sustainability: A review of methods with a view to EMU. In Proceedings of the Fiscal Sustainability Conference, pp. 21–60. Rome: Banca d’Italia.CrossRefGoogle Scholar
Baldacci, E., Petrova, I., Belhocine, N., Dobrescu, G., and Mazraani, S. (2011) Assessing Fiscal Stress. IMF working paper 11/100.Google Scholar
Barro, R. J. (1990) Government spending in a simple model of endogenous growth. Journal of Political Economy 98 (5), S103–S125.CrossRefGoogle Scholar
Bi, H. and Leeper, E. M. (2013) Analysing Fiscal Sustainability. Bank of Canada working paper 2013–27.Google Scholar
Blanchard, O. J. (1990) Suggestions for a New Set of Fiscal Indicators. OECD Economics Department working paper 79.Google Scholar
Bohn, H. (1998) The behavior of U.S. public debt and deficits. Quarterly Journal of Economics 113 (3), 949–963.CrossRefGoogle Scholar
Bohn, H. (2008) The sustainability of fiscal policy in the United States. In Neck, R. and Sturm, J. (eds.), Sustainability of Public Debt, pp. 15–49. Cambridge: MIT Press.Google Scholar
Bruce, N. and Turnovsky, S. (1999) Budget balance, welfare, and the growth rate: Dynamic scoring of the long-run government budget. Journal of Money, Credit and Banking 31 (2), 162–186.CrossRefGoogle Scholar
Buffie, E. E., Berg, A., Pattillo, C., Portillo, R., and Zanna, L. F. (2012) Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces. IMF working paper 12/144.Google Scholar
Buiter, W. H. (1983) Measurement of the public sector deficit and its implications for policy evaluation and design. IMF Staff Papers 30 (2), 306–349.CrossRefGoogle Scholar
Buiter, W. H. (1985) A guide to public sector debt and deficits. Economic Policy 1 (1), 13–79.CrossRefGoogle Scholar
Buiter, W. H. (1987) The Current Global Economic Situation, Outlook and Policy Options, with Special Emphasis on Fiscal Policy Issues. CEPR discussion paper 210.Google Scholar
Buiter, W. H., Corsetti, G., and Rubini, N. (1993) Excessive deficits: Sense and nonsense in the treaty of Maastricht. Economic Policy 8 (16), 57–100.CrossRefGoogle Scholar
Cafiso, G. and Cellini, R. (2014) Fiscal consolidations and public debt in Europe. % International Tax and Public Finance 21 (4), 614–644.CrossRefGoogle Scholar
Canofari, P., Marini, G., and Piersanti, G. (2015) Expectations and Systemic risk in EMU government bond spreads. Quantitative Finance 15 (4), 711–724.CrossRefGoogle Scholar
Cordella, T., Ricci, L. A., and Ruiz-Arranz, M. (2010) Debt overhang or debt irrelevance? IMF Staff Papers 57 (1), 1–24.CrossRefGoogle Scholar
Croce, M. E. and Juan-Ramon, M. V. H. (2003) Assessing Fiscal Sustainability: A Cross Country Comparison. IMF working paper 03/145.CrossRefGoogle Scholar
Chudik, A., Mohaddes, K., Pesaran, M. H., and Raissi, M. (2017) Is there a debt threshold effect on output growth? Review of Economics and Statistics 99 (1), 135–150.CrossRefGoogle Scholar
De Grauwe, P. and Ji, Y. (2012) Self-fulfilling crises in the Eurozone: An empirical test. Journal of International Money and Finance 34, April, 15–36.CrossRefGoogle Scholar
DeLong, J. B. and Summers, L. H. (2012) Fiscal policy in a depressed economy. Brookings Papers on Economic Activity 43 (1), 233–297.CrossRefGoogle Scholar
Egert, B. (2015) Public debt, economic growth and nonlinear effects: Myth or reality? Journal of Macroeconomics 43 (C), 226–238.CrossRefGoogle Scholar
Fournier, J. M. and Fall, F. (2015) Limits to Government Debt Sustainability. OECD Economics Department working paper 1229, June.Google Scholar
Ghosh, A., Kim, J., Mendoza, E., Ostry, J., and Qureshi, M. (2013) Fiscal fatigue, fiscal space, and debt sustainability in advanced economies. Economic Journal 123 (566), F4–F30.CrossRefGoogle Scholar
Hamilton, J. D. and Flavin, M. A. (1986) On the limitations of government borrowing: A framework for empirical testing. American Economic Review 76 (4), 808–819.Google Scholar
Heller, P. (2005) Understanding Fiscal Space. IMF working paper 05/4.Google Scholar
Horne, J. (1991) Indicators of Fiscal Sustainability. IMF working paper 91/5.CrossRefGoogle Scholar
House, C. L., Proebsting, C., and Tesar, L. L. (2017) Austerity in the Aftermath of the Great Recession. NBER working paper 23147.CrossRefGoogle Scholar
IMF and World Bank (2012) Revisiting the Debt Sustainability Framework for Low-Income Countries. IMF policy papers.CrossRefGoogle Scholar
IMF (2014) Is it time for an infrastructure push? The macroeconomic effects of public investment. In World Economic Outlook.Google Scholar
IMF (2016) Assessing Fiscal Space: An Initial Consistent Set of Considerations. IMF policy papers.Google Scholar
Ireland, P. (1994) Supply-side economics and endogenous growth. Journal of Monetary Economics 33 (3), 559–571.CrossRefGoogle Scholar
Ize, A. (1991) Measurement of fiscal performance in IMF-supported programs: Some methodological issues. In Blejer, M. I. and Cheasty, A. (eds.), How to Measure the Fiscal Deficit, pp. 52–84. Washington, DC: International Monetary Fund.Google Scholar
Jones, L. E. and Manuelli, R. E. (1990) A convex model of equilibrium growth: Theory and policy implications. Journal of Political Economy 98 (5), 1008–1038.CrossRefGoogle Scholar
Jones, L. E., Manuelli, R. E., and Rossi, P. E. (1993) Optimal taxation in models of endogenous growth. Journal of Political Economy 101 (3), 485–517.CrossRefGoogle Scholar
Larch, M. and Martins, J. Nogueira (2007) Fiscal Indicators. European Economy – Economic paper 297 (Proceedings from the Directorate-General for Economic and Financial Affairs Workshop Brussels, September 22, 2006).Google Scholar
Marini, G. and Piergallini, A. (2008) Indicators and Tests of Fiscal Sustainability: An Integrated Approach. CEIS research paper 111.CrossRefGoogle Scholar
Miller, M. (1983) Inflation Adjusting the Public Sector Financial Deficit. In Kay, J. (ed.), The 1982 Budget. London: Basil Blackwell.Google Scholar
Ostry, J. D., Ghosh, A. R., Kim, J. I., and Qureshi, M. S. (2010) Fiscal Space. IMF Staff position note 10/11.CrossRefGoogle Scholar
Ostry, J. D., Ghosh, A. R., and Espinoza, R. (2015) When Should Public Debt Be Reduced?. IMF Staff discussion note 15/10.CrossRefGoogle Scholar
Panizza, U. and Presbitero, A. F. (2014) Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics 41 (C), 21–41.CrossRefGoogle Scholar
Pecorino, P. (1993) Tax structure and growth in a model with human capital. Journal of Public Economics 52 (2), 251–271.CrossRefGoogle Scholar
Pescatori, A., Sandri, D., and Simon, J. (2014) Debt and Growth: Is There a Magic Threshold? IMF working paper 14/34.CrossRefGoogle Scholar
Rebelo, S. (1991) Long-run policy analysis and long-run growth. Journal of Political Economy 99 (3), 500–521.CrossRefGoogle Scholar
Schadler, S. (2016) Does the Level of Public Debt Matter? Centre for International Governance Innovation. Policy brief 76.Google Scholar
Trehan, B. and Walsh, C. (1988) Common trends, the government budget constraint, and revenue smoothing. Journal of Economics Dynamics and Control 12 (2–3), 425–444.CrossRefGoogle Scholar
Turnovsky, S. J. (1996) Optimal tax, debt, and expenditure policies in a growing economy. Journal of Public Economics 60 (1), 21–44.CrossRefGoogle Scholar
Turnovsky, S. J. (2000) Fiscal policy, elastic labor supply, and endogenous growth. Journal of Monetary Economics 45 (1), 185–210.CrossRefGoogle Scholar
Wyplosz, C. (2011) Debt sustainability assessment: Mission impossible. % Review of Economics and Institutions 2 (3), 1–37.Google Scholar