Essays on fiscal policy and debt sustainability

The rst chapter develops an endogenous growth model with public debt and publicly nanced infrastructure and human capital accumulation. The government sets the primary surplus as a positive function of the debt-GDP ratio to ensure intertemporal solvency. Conditions for the existence of a unique equilibrium and saddle-path stability are discussed: in a simplied version of the model these are ensured by a strong enough reaction to a debt increase. Dynamics associated with debt-reducing policies and budget-neutral scal reforms in a calibrated economy are described through numerical simulations. Tax-based scal consolidations turn out growth-enhancing in the long run, while spending cuts improve welfare. In general, a trade-o emerges between short and long-run growth, but it is weaker when consolidation is implemented by reducing the debt-GDP target. Reallocating funds from education to infrastructure and increasing the government size may also boost economic growth, but only the former policy change is also welfare improving. The second chapter studies the growth and welfare eects of alternative scal policy reforms in a model calibrated to describe an over-indebted advanced economy. When a debt feedback rule is used, scal consolidations can stimulate long-run growth, and, if based on spending cuts, even improve welfare. Indeed, as the debt stock declines, tax cuts and increases in public spending follow, thus encouraging the agent to spend more time on work and education. On the one side, this restricts the eectiveness of debt-reducing policies, on the other it boosts growth and improves the welfare results. Shifting the tax burden from labor to capital or consumption also has positive eects on long-run growth, but increasing the capital tax rate should be avoided if the government is concerned about containing the debt-GDP ratio or if the goal of the policy-maker is to improve welfare. What constitutes ample scal space or a \safe level of debt" to conduct countercyclical policy while ensuring debt sustainability? The last chapter addresses the question by exploring the relationship between debt dynamics, and the probabilistic distribution of the primary balance and the eective interest rate. Using this approach, we nd that two-thirds of Low-Income Developing Countries (LIDCs) presently have scal policy space to address adverse shocks, subject to the availability of domestic and external nancing. Countries with strong institutional capacity tend to have more scal space: seventy-ve percent of countries with high and medium institutional capacity maintain debt levels below both their \debt sustainability ceiling" and their \safe debt" level estimated in this paper. Countries with strong institutional capacity tend to have more scal space: seventy-ve percent of countries with high and medium institutional capacity maintain debt levels below both their \debt sustainability ceiling" and their \safe debt" level estimated in this paper. Countries with weak institutional capacity, mostly countries in con ict and fragile states, tend to lack scal space.