04-12-2005Long-Term Fiscal Indicators: "Sustainability versus Terminal Debt Constraints".
The paper provides an assessment of the conceptual and quantitative differences between three alternative ways of deriving long-term indicators of fiscal stance, two of which involve truncation of the time horizon while the third one is based on the government’s intertemporal constraint only and thus involves an effectiely infinite horizon. It turns out that, for the OECD countries, the two finite-horizon alternatives tend to imply too little fiscal consolidation compared to what is required for “true” fiscal sustainability. In other words, the imposition of a fixed horizon typically leads to an excessively optimistic picture of current fiscal stance and may furthermore complicate cross-country comparison.
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