A Response to Bruno Sergi

Abstract

In his note, Bruno Sergi expands on some themes that were implicit in his earlier contribution published in Eastern European Economics (Sergi 1994). Sergi first argues that, given some positive rate of growth of GDP, a country can run government deficits and yet keep the debt-to-GDP ratio constant. From this, he then goes on to argue that the Czech Republic's macroeconomic performance would benefit from a policy that involved running a government deficit, albeit at levels consistent with a constant ratio of debt to GDP. In my introduction to the issue in which Sergi's original article appeared, I expressed skepticism about the feasibility of such a policy. Sergi's current article does little to change my skepticism regarding his policy prescriptions, but I do appreciate both his willingness to contribute his thoughts to Eastern European Economics and the opportunity to expand on my reasons for disagreeing with him. The first part of Sergi's paper is devoted to the arithmetical exposition of the proposition that, in the presence of a positive rate of growth of GDP, to maintain a constant ratio of government debt to GDP the government needs to run a budget deficit. As a mathematical proposition, this is both unassailable and selfevident. However, it has much less bearing on policy making than Sergi suggests. He suggests that the Czech government could run budget deficits yet maintain the existing debt-to-GDP ratio. However, this only becomes a useful policy guide if one accepts Sergi's assumption that the existing Czech debt-to-GDP ratio is optimal. Sergi concedes that he has no theory of the optimal level of debt to GDP, and thus the current ratio is simply