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Flashcards in Chapter 4 Deck (7)
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1

Evsey Domar

As long as public deficit is fixed as a percentage of GDP (alpha <1) and growth is exogenous and constant, the debt/GDP ratio will converge toward a fixed value 

2

Deficit vs Debt

Deficit:

  • Is the excess of spending/expenditure over revenues

 

Debit: 

  • Debt at a given time is the sum of all past budget deficit 
  • Debt therefore is the cumulative excess of past spending over past receipts 

3

Stock Flow Adjustments

  • Is the sum of all changes in the debt level that do not resolve from deficits 
  • e.g. swiss frank - euro 

4

Normative Arguments Public Debt and Deficit

i. Golden Rule (Richard Musgrave)

ii. Smoothing of taxes and reduction of excess burden

iii. smoothing of agg. demand (Keynesian demand managment)

5

Normative Arguments Public Debt and Deficit

i. Goden Rule 

  • The additional debt handed down to future generations must NOT exceed the additional investment we take 

6

Normative Arguments Public Debt and Deficit

ii. smoothing of taxes and reduction of excess burden

  • Excess Burden is a convex fct 
  • tax rates smoothing by allowing for deficits is reducing the discounted excess burden 

7

POSITIVE Arguments Public Debt and Deficit

i. Debt illustion rather than Ricardian Equivalance 

ii. Ratchet Effect 

iii. Binding future Goverments hands

iv. weak position of finance minister

v. expectation of bailout