The Growth of Public Debt: Sustainability, Fiscal Rules, and Monetary Rules

Abstract

The paper addresses first the question of sustainability of debt growth by examining the behavior of taxation implied by fiscal rules respecting a government`s intertemporal budget constraint. Sustainable debt growth may require the tax burden to rise above some socially acceptable level. In this case, while drastic remedies may prove ineffective, a more relevant choice regards the degree of monetary financing of the deficit (as distinct from monetization of the debt), which affects the dynamics of taxation implied by the constraint. Monetary financing is then introduced in a model by Blanchard, and its effects on the interest rate and capital intensity are examined. Some policy implications are finally considered.