Fiscal rules in a monetary economy: Implications for growth and welfare

Abstract

This study considers two fiscal rules, a debt rule that controls the debt‐to‐gross domestic product (GDP) ratio, and an expenditure rule that controls the expenditure‐to‐GDP ratio, in a monetary growth model with financial intermediation. Tightening of fiscal rules promotes economic growth and thus, benefits future generations. However, there could be two equilibria of the nominal interest rates, and the welfare effects of the rules on the current generation are different between the two equilibria. In particular, the effects of a decreased debt‐to‐GDP ratio depend on its initial ratio; a high (low)‐ratio country has no incentive (an incentive) to reduce the ratio further from the viewpoint of the current generation's welfare. This result provides an explanation for difficulties with fiscal reform in countries with already high debt‐to‐GDP ratios.

Is Fiscal Policy One of the Most Important Socio-Economic Drivers for Entrepreneurial Activity in European Union Countries?

“…Successful tax reforms are linked to lowering the average tax burden, especially the one related to corporate income, but maintaining tax progressiveness which positively influences the birth of new firms (Bacher & Brulhart, 2013). Additionally, Ono (2019) suggests the need for a debate focusing on the most effective and adequate fiscal policies that will bring important benefits to the entire economy of the EU member states. Accordingly, the EU countries have been differently impacted by the fiscal policy (Busch et al, 2013), and following the crisis, there has been a need for a new policy agenda which involves more support for entrepreneurship leading towards economic growth (Szabo & Herman, 2012;Copeland & James, 2014).…”