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Fiscal Space

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Author Info

  • Jun Il Kim
  • Atish R. Ghosh
  • Mahvash Saeed Qureshi
  • Jonathan David Ostry

Abstract

In this note, the authors reexamine the issue of debt sustainability in a large group of advanced economies. Their hypothesis is that, when debt is in a moderate range, its dynamics are sustainable in the sense that increases in debt elicit sufficient increases in primary fiscal balances to stabilize the debt-to-GDP ratio. At high debt levels, however, the dynamics may turn unstable, and the debt ratio may not converge to a finite level. Such a framework allows the authors to define a “debt limit†that is consistent with a country’s historical track record of adjustment in the sense that, without an extraordinary fiscal effort, any debt increment beyond this limit would cause debt to increase without bound. This debt limit is not an absolute and immutable barrier, however, but rather defines a critical point above which a country’s normal fiscal response to rising debt becomes insufficient to maintain debt sustainability. Nor should this debt limit be interpreted as being in any sense the optimal level of public debt. Indeed, since this limit delineates the point at which fiscal solvency is called into question—and the analysis abstracts entirely from liquidity/rollover risk—prudence dictates that countries will typically want to be well below their debt limit. Given a country’s normal pattern of adjustment, “fiscal space†is then simply the difference between its debt limit and its current level of debt.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Staff Position Notes with number 2010/11.

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Length: 25
Date of creation: 01 Sep 2010
Date of revision:
Handle: RePEc:imf:imfspn:2010/11

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Related research

Keywords: Fiscal sustainability; Debt management; Developed countries; Public debt; debt dynamics; advanced economies; fiscal space; debt ratio; fiscal effort; fiscal policy; fiscal adjustment; fiscal reaction function; fiscal rules; debt service; debt sustainability; government expenditure; government debt; debt ratios; fiscal performance; primary balance ratio; fiscal balances; fiscal strategies; fiscal deficits; fiscal solvency; primary fiscal balance; fiscal policies; tax increases; fiscal pressures; fiscal adjustment efforts; net debt; fiscal shock; fiscal concerns; fiscal affairs; fiscal ? crisis; spending cuts; fiscal response; average debt ratio; budget constraint;

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Citations

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Cited by:
  1. Mark Allen, 2011. "Fiscal Policy Options in light of Recent IMF Research," CASE Network Studies and Analyses 421, CASE-Center for Social and Economic Research.
  2. Bevan, David, 2012. "Aid, Fiscal Policy, Climate Change, and Growth," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Menzie Chinn, 2011. "Comment on "The Fiscal Stimulus in 2009-11: Trade Openness, Fiscal Space and Exchange Rate Adjustment"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pages 343-347 National Bureau of Economic Research, Inc.
  4. Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
  5. Mundle, Sudipto & M.Govinda Rao & Bhanumurthy, N.R., 2011. "Stimulus, Recovery and Exit Policy G20 Experience and Indian Strategy," Working Papers 11/85, National Institute of Public Finance and Policy.
  6. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2013. "Fiscal space and sovereign risk pricing in a currency union," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 131-163.
  7. Marco Battaglini & Stephen Coate, 2011. "Fiscal Policy and Unemployment," NBER Working Papers 17562, National Bureau of Economic Research, Inc.
  8. Bianconi, Marcelo & Fisher, Walter H., 2011. "Intertemporal Budget Policies and Macroeconomic Adjustment in Indebted Open Economies," Economics Series 271, Institute for Advanced Studies.

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