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OPTIMAL LONG-RUN BUDGETARY POLICIES SUBJECT TO THE MAASTRICHT CRITERIA OR A STABILITY PACT

Published online by Cambridge University Press:  26 September 2002

Maria Dworak ,
Franz Wirl ,
Alexia Prskawetz  and
Gustav Feichtinger
Maria Dworak
Affiliation:
Austrian Academy of Sciences
Franz Wirl
Affiliation:
University of Vienna
Alexia Prskawetz
Affiliation:
Max Planck Institute for Demographic Research
Gustav Feichtinger
Affiliation:
Vienna University of Technology
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Abstract

We investigate the optimal path of the primary surplus that a government will choose to minimize costs that derive from exceeding the Maastricht criteria and generally of a “stability pact,” where we assume three components of costs that are related to (1) the debt-to-GDP ratio, (2) the overall deficit-to-GDP ratio, and (3) the acceptance level of savings in the economy. We show that various political-economic settings can result in completely different equilibrium strategies of the debt-to-GDP ratio and the primary deficit. The spectrum of possible optimal strategies ranges from no stationary solutions to multiple equilibrium and cyclical solutions and from positive to negative levels of the optimal debt-to-GDP ratio. Our results emphasize the importance of macroeconomic and behavioral (acceptance rate of a policy) variables in order to explain complex economic time series.

Keywords

Dynamic Programming/Optimal ControlMultiple EquilibriaLocal BifurcationLimit CyclesBudgetary PoliciesMaastricht Criteria
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 6 , Issue 5 , November 2002 , pp. 665 - 686
Copyright
© 2002 Cambridge University Press

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