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On Fixed and Variable Fiscal Surplus Rules

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  • International Monetary Fund

Abstract

Fiscal rules are being increasingly used by both emerging and developed economies. This paper analyzes two alternative fiscal policy rules in terms of their impact on debt sustainability: a rule that fixes the ratio of primary surplus to GDP ("fixed surplus rule") and one that sets the primary surplus as a linear function of debt to GDP ratio ("variable surplus rule"). A simple debt dynamics equation, incorporating real shocks, is constructed, and the probability of exceeding the critical debt level is simulated using Monte Carlo techniques. The results show that the variable surplus rule performs better than the simple fixed surplus rule, by reducing debt sustainability concerns and the necessary medium-term primary surplus. This result hinges on the government''s ability to make a credible commitment to the variable surplus rule in the medium run.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/117.

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Length: 14
Date of creation: 01 Jul 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/117

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Keywords: Debt sustainability; debt ratio; fiscal policy; debt dynamics; fiscal rules; fiscal policy rules; public debt; debt stock; external debt; fiscal rule; average debt ratio; primary budget surplus; budget surplus; central bank; fiscal surplus; fiscal prudence; public sector debt; debt ratios; debt management; debt overhang; domestic debt; national debt; prudent fiscal policy; debt crises; debt intolerance; terms of debt;

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References

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  1. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  2. Halpern, László & Neményi, Judit, 2002. "Fiscal Foundation of Convergence to European Union in Pre-Accession Transition Countries," Discussion Paper Series 1: Economic Studies 2002,03, Deutsche Bundesbank, Research Centre.
  3. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
  4. George Kopits, 2001. "Fiscal Rules," IMF Working Papers 01/145, International Monetary Fund.
  5. Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(7), pages 1383-1406, July.
  6. Luis Catão & Sandeep Kapur, 2004. "Missing Link," IMF Working Papers 04/51, International Monetary Fund.
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Cited by:
  1. Iulia Andreea Bucur & Simona Elena Dragomirescu, 2013. "An Analysis Of The Fiscal Convergence Criteria In The European Union In Terms Of The Sustainability," Studies and Scientific Researches. Economics Edition, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, issue 18.

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