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This paper derives the optimal response of the primary budget balance to changes in the public debt as a share of gross domestic product (GDP) in a stochastic model of debt. Under the optimal solution, the surplus reactivity to the debt‐GDP ratio is independent of the debt ratio itself, but its size depends on the degree of uncertainty surrounding the impact of fiscal policies. We characterize the properties of the optimal control policy by proposing different metrics that may be used to assess fiscal soundness and as early warning indicators of fiscal imbalances. [ABSTRACT FROM AUTHOR]

The objective of the paper is to study how the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale‐less endogenous growth model, where the engine of growth are successful innovations. Our laboratory is a prototypical quality ladder model with a labor/leisure choice where research and development productivity is decreasing in the size of the economy. Our contribution is to show that even when labor supply has no effects on growth in the long run, it will still be optimal to tax capital for reasonable parametrizations of the model. [ABSTRACT FROM AUTHOR]