Public debt and fiscal policy traps

Country output and financial black holes: public–private partnerships and the Laffer curve, fiscal corruption risk, and bailout rate of non-performing loans

“…The model focuses on PPPs (Iossa & Martimort, 2015) in a small open economy (Camous & Gimber, 2018), expressed in discrete time between periods 1 and 2. The late period covers the long-term commitment.…”

“…Let s 1 and z 1 be the profit tax rate and the contemporaneous productivity 3 in period 1, respectively. Let C 1 be provided by the Laffer curve s 1 z 1 C 1 : Thus, the optimisation problem of the government, as an extension of equations 5 to 7 of Camous and Gimber (2018), and equation 28 of Cerqueti and Coppier (2016), is:…”

“…The recent literature on fiscal policy demonstrates the role of fiscal corruption on tax evasion in quantifying its effects on state tax revenues. Camous and Gimber (2018) determine the effect of fiscal austerity and emphasise that the austerity measure can be based on aggregate productivity and the Laffer curve if an endogenous decrease in government spending is in the retrenchment process (Korpi & Palme, 2003) and the government implements fiscal austerity (Sau, 2018). However, as many countries justify their expenses on the grounds of tax collection and debt issuance, it would be practical to focus on public debt management and fiscal corruption.…”

“…NPLs due to corruption in PPP projects 1 make public debt management more difficult, so the model introduces the government bailout rate of NPLs h 2 ð Þ in period 2 to solve the problem with commercial banks, as most PPP projects borrow money from commercial banks, as in the Lao People's Democratic Republic, where its central bank proposes h 2 ¼ 0:65 À 0:7 (Lao Prime Minister, 2014). This study then examines whether a common device to implement fiscal austerity (i.e., h 2 ) that restricts monetary supply to stabilise inflation based on supply side economics (Xi, 2017) can meet the height of the Laffer curve or a certain level of government expenditure G 1 ð Þ in period 1 (Camous & Gimber, 2018;Prati & Tressel, 2006). We provide motivation to the study in Figure 1.…”

“…This study is based on the work of Camous and Gimber (2018), who focus on the cyclicality of tax policy and public debt management in the absence of fiscal corruption. 2 The main contribution of this study is that it emphasises the role of fiscal corruption risk in a more realistic context of public debt management in countries encouraging PPPs.…”