DP20266 Debt-Sensitive Majority Rule as Stabilization Mechanism
We provide a foundation for debt-sensitive majority rules as a debt-brake. Under such rules, the larger the new debt issued in parliament is, the larger the majority required for the approval. Using a standard model with tax distortions, we show that suitable debt-sensitive majority rules can limit debt issuance optimally, as it can be costly for the agenda setter to propose higher debt issues not only for providing public goods, but also to channel subsidies to the groups in the governing coalition. In a recession or when public goods become temporarily more valuable, debt levels increase and debt-sensitive majority rules act as a macroeconomic stabilization mechanism. Debt-sensitive majority rules cannot be replicated by fixed majority rules and debt limits.
