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THE FALLACY OF FISCAL DISCIPLINE

Published online by Cambridge University Press:  12 July 2018

Paolo Canofari,
Alessandro Piergallini and
Giovanni Piersanti
Paolo Canofari*
Affiliation:
LUISS School of European Political Economy
Alessandro Piergallini
Affiliation:
University of Rome Tor Vergata
Giovanni Piersanti
Affiliation:
University of Teramo
*
Address correspondence to: Paolo Canofari, LUISS School of European Political Economy, Via di Villa Emiliani 14, 00197 Rome, Italy; e-mail: pcanofari@luiss.it.
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Abstract

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Fiscal discipline is commonly evaluated on the basis of the debt–gross domestic product ratio, which exhibits a stock variable measured relative to a flow variable. This way of monitoring debt solvency is arguably not consistent with transversality conditions obtained from optimizing macroeconomic frameworks. In this paper, we consider a wealth-based sustainability index of government debt policy derived from a baseline endogenous growth model. We calculate the index from 1999 onward for countries in which the after-growth real interest rate is positive, consistently with the theoretical setup. Results are radically different from common wisdom. We show that the fiscal position is sustainable for both Germany and Italy, and strongly unsustainable for both Japan and France. Policy implications of our findings are discussed.

Keywords

Fiscal DisciplineFinancial WealthSustainability Indicators

Footnotes

We are very grateful to an anonymous referee for many excellent comments and suggestions. We would like to express our deep thanks to Giancarlo Marini for invaluable discussions on this line of enquiry. We also wish to thank Fabrizio Balassone, Patrizio Tirelli, and participants to the International Conference on “Economics, Economic Policies and Sustainable Growth in the Wake of the Crisis,” Università Politecnica delle Marche, Ancona, September 8–10, 2016, the Conference on “Present and Future of the EU and EMU: Debts, Deficits, and Related Institutional Designs,” Sapienza University of Rome, December 2–3, 2016, the XXIX Villa Mondragone International Economic Seminar on “Getting Globalization Right. Sustainability and Inclusive Growth in the post-Brexit Age,” Tor Vergata University Economics Foundation, June 21–22, 2017, the World Finance Conference, University of Cagliari, July 26–28, 2017, and the Conference on “Fiscal Policy Decisions for 2017. Impacts and Evaluations,” Roma Tre University, October 19, 2017, for very helpful comments and remarks. The usual disclaimers apply.

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