Optimal fiscal policy and the Maastricht criteria

This paper investigates the accomplishment of the Maastricht criterion that government debt has to be less than 60% of the gross domestic product (GDP ) by the first of January 1999. To reduce the debt to GDP ratio tight fisca l policies (increasing tax rates and/or decreasing government expenditures) have to be implemented. Fiscal policies in turn affect the accumulation of government debt through their repercussion on the economic growth rate. Us ing optimal control theory with the Maastricht criterion as the endpoint co nstraint, we derive the optimal time path of the fiscal policy and numerica lly investigate its sensitivity with respect to the prevailing economic ind icators, the adjustment time horizon and the initial level of the governmen t debt to GDP ratio.