Cristina D. Checherita-Westphal

Fiscal Sustainability using Growth-Maximising Debt Targets

This article highlights the importance of debt-related fiscal rules and derives growth-maximizing public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should maintain if they wish to maximize growth for panels of OECD, EU and euro area countries. These are not arbitrary numbers, but are founded on long-run optimizing behaviour assuming that governments implement the golden rule of financing; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15% points lower than the estimate for the growth-maximizing debt ratio in our OECD sample and comfortably within the Stability and Growth Pact’s debt ceiling of 60% of GDP. We also indicate how forward-looking budget reaction functions fit into a debt targeting framework.

Personal income tax progressivity and output volatility: Evidence from OECD countries

This paper investigates empirically the effect of personal income tax progressivity on output volatility using macro data from a sample of OECD countries over the period 19822009. Our measure of progressivity is based on the difference between the marginal and the average personal income tax rate for the average production worker. We find supportive empirical evidence for the hypothesis that higher personal income tax progressivity leads to lower output volatility. This effect comes in addition to the stabilizing impact of government size and it is equally important in economic terms. All other factors constant, countries with more progressive personal income tax systems seem to benefit from stronger automatic stabilizers.

Boundedly- and Non-Rational Travel Behavior and Transportation Policy

This paper examines boundedly rational and non-rational travel behavior and their implications for transportation policy. Following Herbert Simon, the paper posits that individual rationality is “bounded” by cognitive capacity, and that affective factors influence decision-making. Its primary aim is to assess how well policy and planning models address such behavior and whether such behavior “matters” in a public policy sense. The paper concludes that it is necessary to incorporate boundedly and non-rational behavior more extensively in travel demand modeling. This could help explain travel behavior patterns that do not usually correspond to the utility maximization paradigm, and assist public policy decision makers in making wiser choices about transportation investment and management.