Fiscal Policy Dynamics with a Public Debt Guideline

Israel Economic Review, Vol. 2 No. 1, 91-106, 2004

16 Pages Posted: 19 Aug 2012

See all articles by Zvi Hercowitz

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER)

Michel Strawczynski

Bank of Israel - Research Department; Hebrew University of Jerusalem - Dept. of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 19, 2012

Abstract

This paper analyzes the implications of a cost of deviating upwards from a public debt/output guideline, such as the 0.6 ratio of the Maastricht Treaty, in the context of a policymaking fiscal model. Given a preannounced timetable for enforcement, the dynamic paths of the tax rate and government spending, which depart from smoothing over time, and the public debt, are characterized. The model's predictions are that the tax rate is high and government spending is low, prior to the date of starting enforcement, and that at this date the tax rate begins to decline and government spending begins to increase. The model is used to interpret fiscal evidence during the 1990s from three countries with large public debt: Belgium, Italy and Israel.

Keywords: fiscal policy, guideline, public debt

JEL Classification: H30, E62

Suggested Citation

Hercowitz, Zvi and Strawczynski, Michel, Fiscal Policy Dynamics with a Public Debt Guideline (August 19, 2012). Israel Economic Review, Vol. 2 No. 1, 91-106, 2004, Available at SSRN: https://ssrn.com/abstract=2132121

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
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National Bureau of Economic Research (NBER)

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Michel Strawczynski (Contact Author)

Bank of Israel - Research Department ( email )

Bank of Israel Street
Jerusalem
Israel
972-2-6552601 (Phone)

Hebrew University of Jerusalem - Dept. of Economics

Mount Scopus
Jerusalem
Israel

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