This paper analyzes the implications of adding to a tax-smoothing framework the cost
of deviating upwards from a public debt/output guideline. The implications for the
dynamic paths of the tax rate, the debt/output ratio and the government
spending/output ratio are derived. A simulation of the model with Israeli data
suggests that Israeli fiscal behavior is consistent with the (implicit) existence of such a
guideline. Some international perspective, with countries having explicit guidelines in
the context of the Maasricht Treaty, is also presented.
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