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Optimal fiscal policy and the Maastricht criteria. (English) Zbl 0953.91044

Summary: This paper investigates the accomplishment of the Maastricht criterion that government debt has to be less than \(60 \%\) of the Gross Domestic Product (GDP) by the first of January 1999. To reduce the debt to GDP ratio tight fiscal policies (increasing tax rates and/or decreasing government expenditures) have to be implemented. Fiscal policies in turn affect the accumulation of government debt through their repercussion on the economic growth rate. Using optimal control theory with the Maastricht criterion as the endpoint constraint, we derive the optimal time path of the fiscal policy and numerically investigate its sensitivity with respect to the prevailing economic indicators, the adjustment time horizon and the initial level of the government debt to GDP ratio.

MSC:

91B62 Economic growth models
91B74 Economic models of real-world systems (e.g., electricity markets, etc.)
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