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Paolo Canofari, Alessandro Piergallini, Giovanni Piersanti: The Fallacy of Fiscal Discipline

Fiscal discipline is commonly evaluated on the basis of the debt-GDP ratio, which exhibits a stockvariable measured relative to a flow variable. This way of monitoring debt solvency is arguably notconsistent with transversality conditions obtained from optimizing macroeconomic frameworks. In thispaper we consider a wealth-based sustainability index of government debt policy derived from abaseline endogenous growth model. We calculate the index from 1999 onwards for countries in whichthe after-growth real interest rate is positive, consistently with the theoretical setup. Results areradically different from common wisdom. We show that the fiscal position is sustainable for bothGermany and Italy, and strongly unsustainable for both Japan and France. Policy implications of ourfindings are discussed.

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Sep 02_2018 Canofari-Piersanti-Piergallini.pdf292.81 KB