A Comparison of Debt and Primary-Deficit Constraints

38 Pages Posted: 20 Aug 2008

See all articles by Roel M. W. J. Beetsma

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Marcos Poplawski Ribeiro

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII); University of Amsterdam

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Date Written: July 2008

Abstract

This paper compares constraints on the public debt with constraints on the primary deficit. The analysis takes into account how an optimizing government reacts to the different constraints when deciding on a spending and borrowing plan. We find that the economy behaves similarly under both constraints, although for our benchmark calibration welfare is higher under the debt constraint. Further, the debt constraint is more robust against changes in the interest rate. Our results lend support to the enhanced focus on the public debt after the recent reform of the Stability and Growth Pact.

Keywords: fiscal constraints, myopia, social welfare, Stability and Growth Pact

JEL Classification: E62, H30, H60

Suggested Citation

Beetsma, Roel M. W. J. and Ribeiro, Marcos Poplawski and Schabert, Andreas, A Comparison of Debt and Primary-Deficit Constraints (July 2008). CEPR Discussion Paper No. DP6897. Available at SSRN: https://ssrn.com/abstract=1240207

Roel M. W. J. Beetsma (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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Tinbergen Institute ( email )

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Marcos Poplawski Ribeiro

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

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University of Amsterdam

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Andreas Schabert

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

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Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

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Amsterdam, 1018 WB
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