Selected method for determining fiscal targeting rules: Results for Poland

Abstract

Objective: The objective of the article is the presentation of a selected method for determining fiscal targeting rules. The proposed fiscal rules make it possible to achieve the intended goals. In this article, the main goal of fiscal policy was the minimisation of deviations of the general government debt-to-GDP ratio from the target value. In the proposed method for determining fiscal targeting rules, we also considered the minimalisation of deviation of the inflation rate and output gap from their target values. We present the results of the empirical analysis for Poland.

Research Design & Methods: The main design was quantitative. We used the modelling method. We applied the dynamic optimisation method for determining fiscal targeting rules. The fiscal targeting rule was the solution of selected dynamic optimisation problems with an infinite time horizon and discounting. We used the minimisation problem of the intertemporal loss function. We performed empirical analysis for quarterly data from the first quarter of 2011 to the third quarter of 2022 for Poland. We used the Bellman equation and the envelope theorem.

Findings: In this article, we determined the fiscal targeting rule. This rule, determined as a solution to the minimisation problem of the intertemporal loss function, allows for the calculation of optimal values of the general government debt-to-GDP ratio while also considering the minimisation of deviations of the inflation rate and the output gap from their target values. We could observe the same direction of the optimal values of the debt-to-GDP ratio in different considered cases, but there is a different shift along the axis of ordinates. We could observe that reducing debt during good economic times allows for achieving an acceptable level of the debt-to-GDP ratio during a crisis.

Implications & Recommendations: To minimise the intertemporal loss function, a portion of the financial resources accumulated during non-exceptional periods should be utilised during crises and shock events. Considering other variables such as inflation and the output gap when deciding on the value of the debt-to-GDP ratio, we noted that the fiscal convergence criterion for debt was not always fulfilled.

Contribution & Value Added: In this article, we present a method of determining fiscal rules not only considering the general government debt-to-GDP ratio, but also considering such variables as the inflation rate and the output gap, as well as other variables such as general government balance to GDP ratio and the monetary policy instrument – the interest rate. The novelty of the article is also the determination of the fiscal targeting rule as a solution to the minimisation problem of intertemporal loss function. Thus, they make it possible to determine the optimal general government debt-to-GDP ratio, considering also the minimisation of deviations from the inflation rate and the output gap from their target values.

Keywords

public debt, fiscal targeting rule, intertemporal loss function, minimisation problem, Bellman equation

Author Biography

Agnieszka Przybylska-Mazur

Associate Professor at Department of Statistical and Mathematical Methods in Economics, University of Economics in Katowice (Poland). Her research interests include quantitative methods in economics and finance, fiscal policy, monetary policy, forecasting inflation.

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