Macroeconomic uncertainties, prudent debt targets and fiscal rules

Abstract

By Falilou Fall and Jean-Marc FournierOECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author(s).

Can an Increase in Public Investment Sustainably Lift Economic Growth?

“…The number of years is set so that the debt level in 2040 is the same in the no-policy change scenario and in the investment shift scenario. Public investment has decreasing marginal returns as estimated in Fournier (2016), and the other structural parameters estimated in Fall and Fournier (2015) are homogenous across countries. The most important country-specific parameters that can influence the computation are the initial public investment level, the initial capital stock level, the initial public debt level and the interest rate to growth rate gap.…”

“…The public investment-to-GDP ratio, PINV it , is added as an exogenous variable. This is the framework of Fall and Fournier (2015), in which the effect of public investment on potential growth with decreasing marginal returns as reported in Fournier (2016), is added. 2 An adverse effect of negative output gap on potential GDP is also added to reflect the hysteresis effect of long-term unemployment, as in the FM model.…”

“…2 An adverse effect of negative output gap on potential GDP is also added to reflect the hysteresis effect of long-term unemployment, as in the FM model. The framework of Fall and Fournier (2015) includes three deterministic equations and four estimated stochastic equations, which provide the main coefficients for the simulations. The first deterministic equation is the fiscal reaction function.…”

“…The impacts on GDP growth and government debt ratios of an investment-led stimulus are assessed through a range of scenarios using three macro-structural models which cast different lights on the issues: the Fall and Fournier (2015) model (the F&F model); the Fiscal Maquette, developed in Botev and Mourougane (forthcoming) (the FM model); and the NiGEM macroeconomic model developed and maintained by NIESR (see Box 1). The use of several models allows the main mechanisms at play to be highlighted, as well as the uncertainties surrounding the results.…”

Making public finances more growth and equity-friendly in the euro area

“…High levels of debt can hamper the ability to stabilise the economy (Fall and Fournier, 2015). In turn, deep recessions can harm long-term growth and thus compound sustainability challenges through hysteresis effects.…”