Fiscal Integration (III)

Question 1

What are the 2 elements that explain the public deficit?

Answer 1

1. The Business Cycle or how the GDP growth is behaving in a specific point in time(+ or - output gap)
2. The structural characteristics of the economy and its capacity to collect taxes

Question 2

What is the Public Deficit Formula

Answer 2

Public deficit = contextual deficit + structural deficit

Question 3

What is the formula for Structural deficit(balance)

Answer 3

Structural revenues-Structural spending

Question 4

what is the structural revenues formula

Answer 4

actual revenues*(potential output/acutal output)**alfa

Question 5

what is the structural spending formula

Answer 5

actual spending*(potential output/acutal output)**beta

Question 6

Under which conditions is public deficit sustainable ?

Answer 6

1. Intertemporal budget constraints
2. The role of interest rates and GDP growth rate

Question 7

explain Intertemporal budget constraint

Answer 7

The current stock of debt should equal the present value of all future
primary surpluses to avoid default.

Question 8

explain The role of interest rates and GDP growth rate

Answer 8

If the ratio debt/GDP is constant debt level is sustainable. Since
GDP is rising, debt can also rise without generating weakness.

Question 9

If r > g what must the government run ?

Answer 9

If r > g the government must run a surplus to control debt/GDP

Question 10

If r < g what must the goverment run ?

Answer 10

If r < g the government can afford deficits

Question 11

what’s the formula for Primary balance/GDP

Answer 11

(r-g) (debt / GDP) = Primary balance/GDP