Fiscal Sustainability and Fiscal Soundness

Haizhou Huang

and

Danyang Xie

This paper tackles fiscal sustainability and fiscal soundness. In contrast to the existing literature, our analysis is in a general equilibrium framework. We obtain three results. First, we endogenize growth rate and interest rate,
the two key rates for any study of fiscal sustainability; second, we illustrate that fiscal sustainability in general equilibrium should not be measured by a one-dimension indicator, e.g., debt-to-GDP ratio as in conventional studies, rather it is a line—a fiscal sustainability frontier—in two dimensions, namely, debt-to-GDP ratio and expenditure-to-GDP ratio; third, we obtain a novel and useful index of aggregate fiscal soundness.