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Fiscal fragility: what the past may say about the future

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  • Aizenman, Joshua
  • Pasricha, Gurnain Kaur

Abstract

The end of the great moderation has profound implications on the assessment of fiscalsustainability. The pertinent issue goes beyond the increase in stock of public debt/GDP inducedby the global recession, to include the perspective that the sustainability of a given publicdebt/GDP depends on the future volatility of the difference between real interest rates and GDPgrowth rate. For a given future projected public debt/GDP, we evaluate the possible distributionof the fiscal burden of debt for each OECD country, based on the historical realizations of thereal interest rate and GDP growth differential. Fiscal projections may be alarmist if one jumpsfrom the prior of low fiscal burdens that prevailed during great moderation to the prior ofpermanent high future burden. Yet, the importance of both real interest rate and the GDP growthrate in determining the actual debt burdens as well as the range of scenarios faced by OECDcountries in the past suggests that countries exposed to heightened vulnerability may considerboth short term stabilization (i.e., fiscal stimulus to support the recovery) and forward lookingfiscal reforms (i.e. fiscal tightening to stabilize the debt dynamics).

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt7mf244m2.

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Date of creation: 10 Nov 2010
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Handle: RePEc:cdl:ucscec:qt7mf244m2

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Keywords: Social and Behavioral Sciences; flow burden of public debt; fiscal vulnerability;

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References

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  1. Mishkin, Frederic S., 1981. "The real interest rate: An empirical investigation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 151-200, January.
  2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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Cited by:
  1. Joshua Aizenman & Yothin Jinjarak, 2010. "De facto Fiscal Space and Fiscal Stimulus: Definition and Assessment," NBER Working Papers 16539, National Bureau of Economic Research, Inc.
  2. Aizenman, Joshua & Jinjarak, Yothin, 2011. "The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment," Santa Cruz Department of Economics, Working Paper Series qt1vm5d1p4, Department of Economics, UC Santa Cruz.
  3. Török, Ádám, 2011. "Intézményépítés a túlzott államadósság elleni védekezés érdekében
    [Building institutions to guard against excessive state debt]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 577-591.
  4. Joshua Aizenman & Yothin Jinjarak, 2011. "The Fiscal Stimulus of 2009-2010: Trade Openness, Fiscal Space, and Exchange Rate Adjustment," NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pages 301-342 National Bureau of Economic Research, Inc.
  5. Joshua Aizenman & Gurnain Kaur Pasricha, 2011. "Net Fiscal Stimulus During the Great Recession," NBER Working Papers 16779, National Bureau of Economic Research, Inc.

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