Economics, Econometrics and Finance
4 years ago

Debt constraints fuel expectation-driven fluctuations, impacting stability and sustainability.

RePEc: Research Papers in Economics
Fiscal Policy, Debt Constraint and Expectation-Driven Volatility
Kazuo Nishimura, Thomas Seegmuller, Alain Venditti

Paper Summary

Constraints on public debt can lead to unpredictable fluctuations in the economy. By analyzing a model, researchers found that limiting the ratio of public debt to GDP can actually cause instability. This is because future tax rates are influenced by expected levels of production, creating a self-fulfilling prophecy. Higher debt ratios can exacerbate this effect.

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