Abstract:

In this paper we study the optimal debt policy for Israel and characterize it for the period 1993 onwards. Optimal debt path is related to deviations of government spending, GDP and received unilateral transfers from their long-term trends. According to our framework government spending and GDP are two forces that increase the future path of government debt to GDP ratio, while unilateral transfers tend to reduce it. Our simulation shows that it is possible to reduce statutory tax rates in the future while at the same time allowing for a reduction of debt to GDP ratio.