DP1612 Debt and Deficit Ceilings, and Sustainability of Fiscal Policies: An Intertemporal Analysis

Author(s): Merih Uctum, Michael R. Wickens
Publication Date: March 1997
Keyword(s): Fiscal Criteria, Fiscal Policy, Forecasts, Stochastic Discount Rate, Sustainability
JEL(s): E6, H6, H87
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1612

This paper examines the consequences for the sustainability of fiscal policy of imposing restrictive ceilings on deficits and debt. Our theoretical framework is a generalization of the government intertemporal budget constraint which allows for time-varying interest rates, endogenous primary deficits, a finite planning horizon and future policy shifts. We show how published forecasts can be used and we derive a measure of fiscal pressure suitable for the medium term. We find that fiscal policy is not sustainable for most industrialized countries over an infinite horizon, but is sustainable in the medium term in the absence of ceilings. Imposing ceilings, however, generates unsustainability.