Intertemporal budget constraint as a sustainability criterion

Abstract

This chapter is devoted to a widespread concept of external sustainability which is originally motivated by the notion of fiscal sustainability used in the literature on public finance. Fiscal sustainability is typically defined as the government’s ability to indefinitely continue the same set of fiscal and/or monetary policies while remaining solvent (Burnside, 2005, p. 11). This notion encompasses two central aspects: It builds upon the concept of solvency, i.e., an entity’s ability to repay its debt without explicitly defaulting on it. Beyond that, it imposes a “baseline” on future policy actions (Milesi-Ferretti and Razin, 1996a, p. 4) by requiring the policy stance to be unchanged.