Sustainable Fiscal Policy and Interest Rates under Flexible Exchange Rates

23 Pages Posted: 10 Dec 2010 Last revised: 20 Dec 2012

See all articles by Scott T. Fullwiler

Scott T. Fullwiler

Wartburg College; Bard College - The Levy Economics Institute

Date Written: July 1, 2008

Abstract

Central to current policy debates regarding public pensions, the appropriate macroeconomic policy mix, and any number of other issues related to growth, development, poverty alleviation, and so forth, is the concept of fiscal sustainability. For neoclassical economists, fiscal sustainability is analyzed via the intertemporal government budget constraint (IGBC). Recently, the IGBC has been still more explicitly incorporated into analyses by the IMF and the World Bank internationally and in the U. S. by the Social Security/Medicare Trustees Reports and the Congressional Budget Office (whose current director, Peter Orszag, is a leading author on fiscal sustainability from within the neoclassical paradigm). The purpose of this paper is to demonstrate that key assumptions made by many applying the IGBC – most importantly the notion that interest on the national debt is set in private credit markets – in fact are not applicable to governments issuing their own currencies while operating under flexible exchange rates.

Keywords: fiscal sustainability, fiscal policy, monetary policy, central bank operations

JEL Classification: E42, E43, E61

Suggested Citation

Fullwiler, Scott T., Sustainable Fiscal Policy and Interest Rates under Flexible Exchange Rates (July 1, 2008). Available at SSRN: https://ssrn.com/abstract=1722989 or http://dx.doi.org/10.2139/ssrn.1722989

Scott T. Fullwiler (Contact Author)

Wartburg College ( email )

222 Ninth St. NW
Waverly, IA 50677
United States

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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