Seminar: Fiscal targets and economic stability

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Claire Reicher (IFW-Kiel)

Discussant: Wim Suyker (CPB)

Language: English

Registration: Please register by sending an email to seminars@cpb.nl.

Abstract subject
While European countries have adopted a Fiscal Compact which includes a short-run debt-GDP target (the "1/20" rule), little is known about the effects that the choice of this or another fiscal policy target may have on the stability of debt and output paths. Based on simple model of fiscal policy in a small open economy, it appears that the choice of a fiscal target can determine whether or not the public debt and output follow stable paths. For moderate debt-multiplier combinations, a debt-GDP target can result in instability, while a debt-level target, irrespective of GDP, can result in stability. A deficit target may result in instability for the debt but stability for output, while a fiscal reaction function similar to those found in the macro literature may result in stability for certain parameter values, so long as the response of fiscal policy to the past debt level is strong enough to overcome "clawback" and "confidence" effects. Furthermore, under certain conditions, optimal policy mimics a fiscal reaction function with an acyclical or somewhat procyclical tax rate, a strong response of primary surpluses to output, and a moderate response of primary surpluses to the past debt level. The past behavior of fiscal policy in industrialized countries is broadly in line this set of patterns, with some possible additional room for anticyclical policy.

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