Governments in emerging markets often behave like a "tormented insurer" who tries to smooth government outlays given the randomness of public revenues and in a challenging world in which "liability dollarization" requires them to issue debt denominated in hard currencies, or indexed to tradable goods prices. How can a fiscal authority tell if the stock of public debt is consistent with fiscal solvency in this environment? This paper proposes a quantitative framework that aims to answer this question. The framework emphasizes macroeconomic uncertainty and the transmission mechanism by which this uncertainty affects debt dynamics when asset markets are incomplete. A government making a credible commitment to repay cannot borrow above a "natural" debt limit set by the annuity value of the "catastrophic" level of the primary balance. This limit, and the likelihood that the government may hit it along an equilibrium path, are partly determined by tax and expenditure policies, but they also depend on endogenous and exogenous variables outside the government's control. Liability dollarization implies that endogenous fluctuations of the real exchange rate influence the variability of tax revenues and the government's ability to service debt, and thus affect the natural debt limit and public debt dynamics. The model proposed here quantifies the dynamics of public debt implied by the competitive equilibrium of a two-sector small open economy subject to exogenous shocks to income and the world interest rate, given tax and expenditure policies. The resulting short- and long-run distributions of debt-output ratios deviate sharply from conventional sustainable debt ratios
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Find related papers by JEL classification: F0 - International Economics - - General
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)