Optimal Correction of the Public Debt and Fiscal Resilience Measures

34 Pages Posted: 29 Apr 2020

See all articles by Barbara Annicchiarico

Barbara Annicchiarico

University of Rome, Tor Vergata - Department of Economics and Finance; University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS)

Fabio Di Dio

European Union - JRC-Ispra, European Commision

Stefano Patri

University of Rome I

Date Written: April 29, 2020

Abstract

This paper derives the optimal response of the primary budget surplus to changes in the debt-to-GDP ratio in a stochastic model of debt. Under the optimal solution the surplus reactivity to the debt-to-GDP ratio is independent of the debt ratio itself, but its size depends on economic fundamentals and on the degree of uncertainty surrounding the impact of fiscal policies. We propose two measures of fiscal resilience under the optimal control that may be used to gauge the soundness of a consolidation plan and as early warning indicators of fiscal imbalances.

Keywords: Debt-to-GDP Ratio, Optimal Control, Fiscal Consolidation, Resilience

JEL Classification: H62, H63, E63

Suggested Citation

Annicchiarico, Barbara and Di Dio, Fabio and Patri, Stefano, Optimal Correction of the Public Debt and Fiscal Resilience Measures (April 29, 2020). CEIS Working Paper No. 479 , Available at SSRN: https://ssrn.com/abstract=3588254 or http://dx.doi.org/10.2139/ssrn.3588254

Barbara Annicchiarico

University of Rome, Tor Vergata - Department of Economics and Finance ( email )

Rome, I-00133
Italy

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Via Columbia, 2
Rome, I-00133
Italy

Fabio Di Dio (Contact Author)

European Union - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

Stefano Patri

University of Rome I ( email )

Piazzale Aldo Moro, 5
Rome, 00185
Italy

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