Fiscal Policy Dynamics with a Public-Debt Guideline

16 Pages Posted: 11 Nov 2012

See all articles by Zvi Hercowitz

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER)

Michel Strawczynski

Bank of Israel - Research Department; Hebrew University of Jerusalem - Dept. of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: may 2004

Abstract

This paper analyzes the implications of a cost of deviating upwards from a public debt/output guideline, such as the 0.6 ratio in the Maastricht Treaty, in the context of a fiscal policymaking model. Given a preannounced timetable for enforcement, the dynamic paths of the tax rate and government spending, which depart from smoothing over time, and the public debt are characterized. The model’s predictions are that the tax rate is high and government spending is low prior to the date of starting enforcement, and that at this date the tax rate begins to decline and government spending begins to increase. The model is used to interpret fiscal evidence during the 1990s from three countries with large public debt: Belgium, Italy and Israel.

Suggested Citation

Hercowitz, Zvi and Strawczynski, Michel, Fiscal Policy Dynamics with a Public-Debt Guideline (may 2004). Israel Economic Review, Vol. 2, No. 1, 2004, Available at SSRN: https://ssrn.com/abstract=2173993

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics ( email )

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Michel Strawczynski (Contact Author)

Bank of Israel - Research Department ( email )

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Hebrew University of Jerusalem - Dept. of Economics

Mount Scopus
Jerusalem
Israel

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