Hans Gersbach, 07 September 2010

The Eurozone crisis and debate over fiscal stimulus have emphasized the importance of responsible government debt management. CEPR DP 8001 develops a political economy model in which politicians prop up their reelection chances with debt-financed public projects but postpone the delivery of the projects until the next term. The author proposes to remedy this by instituting debt-threshold contracts which, if violated, would disqualify politicians from standing for reelection. He suggests that such contracts do not impede the stabilization of negative macroeconomic shocks.

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