GOVERNMENT DEBT, BUDGET SURPLUS, AND POPULARITY OF POLITICIANS

This paper sets up a positive model of government behavior to determin e the optimal fiscal policy of a politician who aims to reach a certai n target level of national debt and remain popular at the same time. W e model explicitly the response of the citizens to the fiscal policy s et by the politician. To that end, we assume that citizens form an equ ilibrium acceptance rate of savings and adjust dynamically this saving s rate to the currently prevailing levels of government debt and prima ry surplus. The difference between the equilibrium acceptance rate of savings as formed by the public and the fiscal policy actually chosen by the politician determines the politician popularity. Using the Pont ryagin maximum principle, we derive the optimal level of the fiscal po licy and investigate its local stability depending on the parameters o f the model. We show that cyclical strategies [that is, phases of savi ng (primary surplus) and spending (primary deficit)], may be optimal.