Referierte Aufsätze Web of Science
In: Journal of Economic Dynamics & Control 38 (2014), S. 250-265
This paper studies welfare effects of a soft borrowing constraint on sovereign debt. The constraint is modeled as a proportional fine per unit of debt in excess of a specified reference value, resembling features of the Stability and Growth Pact. Sovereign debt is the result of myopic fiscal policy. It reduces welfare in the absence of lump-sum taxes. The paper shows that the borrowing constraint enhances welfare by reducing long run debt. In an economy calibrated to a generic OECD country, the maximum attainable welfare gain of debt consolidation, which is induced by imposing the optimally parameterized constraint, amounts to 0.5% in terms of consumption. The short run welfare costs of the constraint, which arise from restricting the use of debt to smooth taxes, are quantitatively negligible.
Topics: Public finances
JEL-Classification: E6;H3
Keywords: Myopic governments, Debt bias, Fiscal constraints, Stability and Growth Pact, Social welfare
DOI:
http://dx.doi.org/10.1016/j.jedc.2013.10.008