Alexandru Minea

University of Orléans, University Clermont Auvergne, and Carleton University; alexandru.minea@uca.fr

Abstract:

This paper introduces a fiscal feedback rule (FFR) in an endogenous growth model with public debt dynamics. We assume that part of the debt burden is covered by tax increases (we name this “sterilization”), while the remaining part is financed by issuing new debt. We show that while low sterilization does not ensure the existence of a long-run steady state, high sterilization can lead to multiple steady states and aggregate instability in the form of local and global indeterminacy, potentially condemning the economy to a low-growth/high-debt trap steady state and long-lasting public debt cycles. By combining econometric estimations and a calibration exercise on developed economies, we highlight that these various perils can occur for empirically plausible values of the sterilization coefficient.

Zoom:
https://ase.zoom.us/j/88975840175?pwd=Q0ZnbHl0TjhqcEtzVnhMUWRmdWdPQT09

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