The Growth of Public Debt: Sustainability, Fiscal Rules, and Monetary Rules

The paper first addresses the question of the sustainability of debt growth by examining the behavior of taxation implied by fiscal rules that respect a government's intertemporal budget constraint. Sustainable debt growth may require the tax burden to rise above some socially acceptable level. In this case, whereas drastic remedies may prove ineffective, a more relevant choice concerns the degree of monetary financing of the deficit (as distinct from monetization of the debt), which affects the dynamics of taxation implied by the constraint. Monetary financing is then introduced into a model by Blanchard, and the effects of monetary financing on the interest rate and capital intensity are examined. Finally, some policy implications are considered.