Technical Report Debt Policy Rules in an Open Economy

Hori, Takeo  ,  Morimoto, Keiichi  ,  Maebayashi, Noritaka  ,  Futagami, Koichi

13-07-Rev.pp.1 - 42 , 2015-08 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
* Revised:Fiscal Sustainability, Macroeconomic Stability, and Welfare under Fiscal Discipline in a Small Open Economy [13-07, 2013]
In a small open economy model of endogenous growth with public capital accumulation, we examine the effects of a debt policy rule under which the government must reduce its debt–GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long run debt–GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).

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