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A Balance-Sheet Approach to Fiscal Sustainability

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  • Levy-Yeyati, Eduardo

    (Universidad Torcuato Di Tella and World Bank)

  • Sturzenegger, Federico

    (Harvard U and Universidad Torcuato Di Tella)

Abstract

Recent empirical research on emerging markets debt, currency crises and fiscal sustainability has placed a significant focus on the role of currency mismatches with the emphasis placed on the currency composition of explicit government liabilities. The key insight of this paper is that these liabilities, while relevant, usually represent a small share of actual government liabilities: indeed, as an indicator of fiscal solvency, they are relatively uninformative – and possibly misleading – if not matched with the remaining liabilities (promises of wage and pension payments among others) and the asset side of the government’s balance sheet: financial and real government assets as well as the present value of future tax collection. These non-debt liabilities and assets may be affected by changes in the real exchange rate in a way that dwarfs the effect on the explicit liabilities which are typically the focus of attention. With this in mind, this paper proposes a balance-sheet approach that, as illustrated by the practical applications included here, may radically alter the results from traditional sustainability evaluations – and, more generally, the perception of a country’s fiscal vulnerability.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-044.

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Date of creation: Oct 2007
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Handle: RePEc:ecl:harjfk:rwp07-044

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  1. Márcio Gomes Pinto Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an Application to Brazilian Data," Textos para discussão, Department of Economics PUC-Rio (Brazil) 484, Department of Economics PUC-Rio (Brazil).
  2. Christian Broda & David E. Weinstein, 2004. "Happy News from the Dismal Science: Reassessing the Japanese Fiscal Policy and Sustainability," NBER Working Papers 10988, National Bureau of Economic Research, Inc.
  3. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
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