Public-Debt / Output Guidelines: the Case of Israel.
This paper analyzes the implications of adding to a tax-smoothing framework the cost of deviating upwards from a public debt/output guideline. The implications for the dynamic paths of the tax rate, the debt/output ratio and the government spending/output ratio are derived. A simulation of the model with Israeli data suggests that Israeli fiscal behavior is consistent with the (implicit) existence of such a guideline. Some international perspective, with countries having explicit guidelines in the context of the Maasricht Treaty, is also presented.