Fiscal policy, public debt and the term structure of interest rate (Q1806323)

This book is based on a doctoral thesis at the University of Saarland in Germany. It addresses the question of sustainability of public debt and of fiscal policy in a stochastic AK model. In addition, the author also looks at the related topics of the effect of public debt on the term-structure of interest rates and on economic growth. The introduction is in Chapter 1. Chapter 2 presents the deterministic version of the model which can be solved analytically. The author points out that sustainable growth puts an upper bound on the tax rate that can be levied. He could have gone further had his analysis not been limited by a somewhat inflexible framework. Chapter 3 presents the basic stochastic framework. The dynamics of the interest rate is analyzed, which is of technical interest since the dynamics is highly non-linear. Chapter 4 analysis the impact of fiscal policy and of the debt/taxation decision on its financing on the term structure of interest rate. Chapter 5 considers the impact of fiscal policy on economic growth. The author identifies two regimes of growth, one with a higher growth rate corresponding to high capital/labor ratio, and another with a lower growth rate corresponding to a low capital/labor ratio which is an absorbing state of the system. Chapter 6 looks at the dynamic interaction between interest rate and fiscal policy. The main result is that high debt ratios go hand in hand with high interest rates. Chapter 7 presents the conclusion. The author certainly displays impressive analytical skills in studying a very difficult problem. The interest of his book is undermined by his maintained assumption of a mechanical fiscal policy in which government expenditure is a fixed proportion of current output and taxes are a fixed proportion of current wealth. If the author wanted to provide a tool to evaluate alternative fiscal policies, he needed to start with some welfare criterion which is missing here. If he wanted to address debt crisis, his choice of admissible fiscal polices makes his model of limited value. The author has made a lot of progress in understanding the interaction between public debt and the financial markets and he should be commended for that, but his work is still unfinished.