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Faculty of Economics

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Robertson, D. and Tambakis, D.

Long-Run Debt Ratios with Fiscal Fatigue

CWPE1674

Abstract: We investigate the implications of fiscal fatigue - governments' declining ability to increase primary fiscal balances with rising public debt - utilising the cubic policy rule estimated by Ghosh et al. (2013). We characterize its equilibrium debt-output ratios and fiscal space, and analyze its dynamic stability in the deterministic (long-run) case. There may be up to three equilibria, of which the intermediate one will typically require a stability criterion stricter than fiscal solvency. We illustrate numerically for six developed economies.

Keywords: Debt sustainability, Debt-output ratio, Fiscal policy rules

JEL Codes: E60 H00 H60

Author links: Donald Robertson  Demosthenes N.  Tambakis  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1674.pdf

Open Access Link: https://doi.org/10.17863/CAM.7829