Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions

Azizi, Karim and Canry, Nicolas and Chatelain, Jean-Bernard and Tinel, Bruno (2013): Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions.

Abstract

This paper investigates the relevance of the No-Ponzi game condition for public debt (i.e. the public debt growth rate has to be lower than the real interest rate, a necessary assumption for Ricardian equivalence) and of the transversality condition for the GDP growth rate (i.e. the GDP growth rate has to be lower than the real interest rate). First, on the unbalanced panel of 21 countries from 1961 to 2010 available in OECD database, those two conditions were simultaneously validated only for 29% of the cases under examination. Second, those two conditions were more frequent in the 1980s and the 1990s when monetary policies were more restrictive. Third, in tune with the Keynesian view, when the real interest rate is higher than the GDP growth, it corresponds to 75% of the cases of the increases of the debt/GDP ratio but to only 43% of the cases of the decreases of the debt/GDP ratio (fiscal consolidations).

• Item Type: MPRA Paper
• Language: English
• Keywords: Government solvency, Austerity, Fiscal Consolidation, No-Ponzi Game condition, transversality condition, Keynesian countercyclical budgetary policy, monetary policy, economic growth.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; H - Public Economics > H6 - National Budget, Deficit, and Debt; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Amable B. and Azizi K. (2011) “Varieties of capitalism and varieties of macroeconomic policy. Are some economies more procyclical than others?”, Max Planck Institute Discussion paper 11/6.

Amable B., Chatelain J.B., and Ralf K. (2010) “Patents as collateral”. Journal of Economic Dynamics and Control. vol. 34(6), pp. 1092 – 1104.

Arestis, Philip and Malcolm Sawyer (2004a) “On the Effectiveness of Monetary Policy and of Fiscal Policy”, Review of Social Economy, December, LXII (4), pp. 441-463.

Arestis, Philip and Malcolm Sawyer (2004b) “On fiscal policy and budget deficits” Intervention Journal of Economics, 1(2), 65-78.

Barro R.J. (1974) “Are government bonds net wealth?” Journal of Political Economy, vol. 82(6), pp. 1095 – 1117.

Barro R.J. and Sala-I-Martin (2004) Economic Growth (2nd edition), MIT Press, Cambridge.

Blanchard O.J. and Fischer S. (1989). Lectures in Macroeconomics. MIT Press. Cambridge, USA.

Blanchard O.J. and Leigh S. (2013). Growth Forecast Errors and Fiscal Multipliers, IMF working paper, 13/1.

Blanchard O.J. and P. Weil: (1992): Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty, NBER working paper (later published in the Berkeley Electronic Journals in Macroeconomics, Advances in Macroeconomics: 2001).

Caputo M.R. (2005): Foundations of Dynamic Economic Analysis: Optimal Control Theory and Applications. Cambridge University Press. Cambridge, United Kingdom.

Chatelain J.B. (2010): Can Statistics Do Without Artefacts? Cournot Centre, Prisme 19.

Chatelain J.B. and Ralf K. (2012a): The Failure of Financial Macroeconomics and What to Do about It. The Manchester School. 80 (S1), pp.21-53.

Chatelain J.B. and Ralf K. (2012b). Spurious regression and Near Multicollinearity, with an application to Aid Policies and Growth. Centre d’Economie de la Sorbonne working paper 12/078.

Chiang, A.C. (1992), Elements of Dynamic Optimization, New York: McGraw-Hill, Inc.

Domar E. (1944) “The ‘Burden of the Debt’ and the National Income”, American Economic Review, December, 34 (4), pp. 798-827.

Hansen A. and G. Greer (1942) “The Federal Debt and the Future”, Haper’s Magazine, avril, pp. 489-500.

Haliassos M. and Tobin J. (1990). “The Macroeconomics of Government Finance”. In Handbook of Monetary Economics, vol. 2, (B.M. Friedman and F.H. Hahn editors), Elsevier Science Publishers, Amsterdam. 889-959.

Halkin, H. (1974), “Necessary Conditions for Optimal Control Problems with Infinite Horizons,” Econometrica, 42, 267–272.

Heijdra B.J. and Van Der Ploeg F. (2002). Foundations of Modern Macroeconomics. Oxford University Press, Oxford.

Kamihigashi T. (2005). “Necessity of the Transversality Condition for Stochastic Models with Bounded or CRRA Utility,” Journal of Economic Dynamics and Control 29(8), 1313-1329.

Keynes J.M. (1923). “A Tract on Monetary Reform”. London, Macmillan.

Lerner A. (1943) “Functional finance and the federal debt”, Social Research, 10:1/4, pp. 38-51.

Michel, P. (1982), “On the Transversality Condition in Infinite Horizon Optimal Problems,” Econometrica, 50, 975–985.

Piketty T. (2011) “On the long run evolution of inheritance: France 1820-2050.” Quarterly Journal of Economics, 126, 1071-1131.

Pucci M. and Tinel B. (2011) “Réductions d’impôts et dette publique en France », Revue de l’OFCE, 116, janvier, pp. 125-148.

Ramsey F.P. (1928) «A mathematical theory of saving », The Economic Journal, 38(152), pp. 543-559.