This paper investigates the behavior of public debt in countries forming a union (as outlined, e.g., by the Maastricht treaty). We consider a federal union of states where the center has limited control over the spending patterns of the union members, and where the union members' behavior has r...

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Bibliographische Detailangaben

1. Verfasser:	Aizenman, Joshua 1949- (VerfasserIn)
Format:	Buch
Sprache:	English
Veröffentlicht:	Cambridge, Mass. 1994
Schriftenreihe:	National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 4656
Schlagworte:	Mathematisches Modell Debts, Public > Mathematical models Fiscal policy International economic integration
Zusammenfassung:	This paper investigates the behavior of public debt in countries forming a union (as outlined, e.g., by the Maastricht treaty). We consider a federal union of states where the center has limited control over the spending patterns of the union members, and where the union members' behavior has repercussions for the future public debt. The public has preferences against higher public debt, and will oust high-debt administrations. Adverse shocks are shown to induce a regime switch from a cooperative outcome to limited cooperation, and from limited cooperation to the noncooperative outcome. While a transitory adverse shock calls for a higher public debt in the cooperative regime, the switch towards limited cooperation entails a drop in the public debt (relative to the cooperative desirable outcome). With limited cooperation further drops in income will call for a drop in public debt. If the adverse shock is powerful enough, sustaining limited cooperation may become unfeasible. A regime switch may yield nonlinearities, where the macroeconomic behavior is abruptly altered following the switch. Our model provides a tentative support for limits on public debt, needed to free the instrument of deficit financing for use in bad recessions.
Beschreibung:	23 S. graph. Darst.