Keynesian and Neoclassical Fiscal Sustainability Indicators, with Applications to Emu Member Countries
31 Pages Posted: 17 Nov 2004
Date Written: November 2004
Abstract
The purposes of this paper are twofold: first, it aims at critically evaluating the solvency criterion, pioneered by Hamilton and Flavin (1986), which is nowadays almost hegemonic in the analysis of public debt sustainability, and at illustrating alternative measures of sustainability grounded on the dynamic stability approach originated by Domar (1944); secondly, it looks at sustainability in EMU member countries, with particular attention given to the relations between sustainability and the design of fiscal rules. The results show that the 3% rule imposed by the Maastricht treaty can be justified as a sustainability requirement for an average EMU member country. At the same time, the dispersion around this average is quite substantial: this questions the viability of uniform deficit caps across EMU member countries.
Keywords: Public debt sustainability, dynamic analysis, solvency constraint, EMU, fiscal rules
JEL Classification: E62, H63
Suggested Citation: Suggested Citation
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