Fiscal Rules and Sustainability of Public Finances in an Endogenous Growth Model

48 Pages Posted: 9 Dec 2004

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)

Nicola Giammarioli

European Central Bank (ECB)

Date Written: August 2004

Abstract

This paper presents a two period overlapping generations model with endogenous growth in the presence of a public sector with objectives of convergence for public debt and primary balance to GDP ratios. In order to ensure the existence of converging paths towards the target values of fiscal variables, we introduce a simple fiscal policy rule. According to this rule, the primary balance ratio is adjusted in function of the distance between the current and the target levels of the public debt and the primary surplus to GDP ratios. It is shown that the fiscal rule displaying time invariant parameters may produce non linear dynamic processes of adjustment of the fiscal ratios as well as endogenous fluctuations in the rate of growth of the economy. In addition the transitional process towards fiscal targets critically depends on the adjustment tool chosen by the fiscal authorities to implement the rule.

Keywords: Fiscal Policy, Sustainability of Public Finances, Endogenous Growth

JEL Classification: H62, H63, 041

Suggested Citation

Annicchiarico, Barbara and Giammarioli, Nicola, Fiscal Rules and Sustainability of Public Finances in an Endogenous Growth Model (August 2004). ECB Working Paper No. 381. Available at SSRN: https://ssrn.com/abstract=569628

Barbara Annicchiarico (Contact Author)

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

Nicola Giammarioli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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