The Perils of Fiscal Rules

Maxime Menuet (1) , Alexandru Minea (2) , Patrick Villieu (1)

1 LEO - Laboratoire d'Économie d'Orleans
2 CERDI - Centre d'Études et de Recherches sur le Développement International

This paper develops a limit-cycle-based theory of debt fluctuations through a simple endogenous growth model. Public debt and deficit are introduced by relaxing the balanced-budget rule hypothesis, and assuming a simple fiscal rule. Our main result is that fiscal rules can be destabilizing, leading to (i) multiple equilibria-four balanced-growth paths can emerge-, (ii) endogenous public debt cycles, which appear both in the short and the long run, and (iii) hysteresis phenomena arising from extreme sensitivity of changes in parameters. We also reveal that a balanced-budget rule does not preclude large aggregate fluctuations. Finally, our calibration exercise highlights that our model produces asymmetric cycles consistent with observed stylized facts.

Mots clés: Fiscal rules; Indeterminacy; Limit cycle; Public Debt; Bifurcation

Domaines: Economies et finances

Maxime Menuet, Alexandru Minea, Patrick Villieu. The Perils of Fiscal Rules. 2021. ⟨hal-02291307v2⟩