Fiscal rule and shock amplification : A stochastic endogenous growth model

Abstract : This paper develops a discrete-time stochastic endogenous growth model to study the amplification role of fiscal rules. In our model, transitory shocks exert permanent effects on the level of variables in equilibrium (hysteresis), and can be strongly amplified by the public debt adjustment, leading to a procyclical amplification mechanism (the "public debt accelerator"). This procyclical stance depends on the speed of adjustment of the debt-to-GDP ratio under a fixed-fiscal rule. A cold turkey strategy removes the public debt shock, but at the risk of destabilizing other variables, while a gradualist strategy has a stabilization effect, with detrimental consequences in the long-run. Finally, we show that a flexible-fiscal rule helps smooth aggregate variables by limiting the cuts in productive public spending.
Document type :
Preprints, Working Papers, ...
Complete list of metadatas

Cited literature [49 references]  Display  Hide  Download

https://hal.archives-ouvertes.fr/hal-02153887
Contributor : Maxime Menuet <>
Submitted on : Wednesday, June 12, 2019 - 3:46:09 PM
Last modification on : Friday, July 5, 2019 - 1:23:23 AM

File

second.pdf
Files produced by the author(s)

Identifiers

  • HAL Id : hal-02153887, version 1

Collections

Citation

Maxime Menuet. Fiscal rule and shock amplification : A stochastic endogenous growth model. 2019. ⟨hal-02153887v1⟩

Share

Metrics

Record views

17

Files downloads

35