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Andrew Hughes Hallett

16 July 2010
WORKING PAPER SERIES - No. 1220
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Abstract
This paper does two things. First it examines the use of real time inter-annual cash data and the role of early interventions for improving the monitoring of national fiscal policies and the correction of fiscal indiscipline. Early warnings are important because they allow us to spread the necessary adjustments over time. Examples from Germany and Italy show that large corrections are often necessary early on to make adjustments later on acceptable and to keep debt ratios from escalating. There is a credibility issue here; we find the difference between front-loaded and back-loaded adjustment schemes is likely to be vital for the time consistency of fiscal policymaking. Second, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improvement tests more often. Thus the budget savings from early intervention and the use of cash data are significant; in our examples they are similar in size to the operating budget of the department of housing and urban development in Germany. Similar results apply in other Eurozone countries.
JEL Code
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H50 : Public Economics→National Government Expenditures and Related Policies→General
H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt
24 September 2012
WORKING PAPER SERIES - No. 1472
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Abstract
This paper highlights the importance of debt-related fiscal rules and derives growth-maximising public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should try to maintain if they wish to maximise growth for panels of OECD, EU and euro area countries, respectively. These are not arbitrary numbers, as many of the fiscal rules in the literature suggest, but are founded on long-run optimising behaviour, assuming that governments implement the so-called golden rule over the cycle; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15 percentage points lower than the estimate for the growth-maximising debt ratio in our OECD sample and comfortably within the Stability and Growth Pact's debt ceiling of 60% of GDP. We also indicate how forward looking budget reaction functions fit into a debt targeting framework.
JEL Code
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General