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Probabilistic Sustainability of Public Debt

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  • Evan Tanner
  • Issouf Samaké

Abstract

This paper examines the sustainability of fiscal policy under uncertainty in three emerging market countries, Brazil, Mexico, and Turkey. For each country, we estimate a vector autoregression (VAR) that includes fiscal and macroeconomic variables. Retrospectively, a historical decomposition shows by how much debt accumulation reflects unsustainable policy, adverse shocks, or both. Prospectively, Monte Carlo techniques reveal the primary surplus that is required to keep the debt/GDP ratio from rising in all but the worst 50 percent, 25 percent, and 10 percent of circumstances. Such a value-at-risk approach presents a clearer menu of policy options than currently used frameworks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/295.

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Length: 42
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/295

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Keywords: Emerging markets; Public debt; Economic models; fiscal policy; debt ratio; fiscal sustainability; fiscal gap; primary deficit; average debt ratio; fiscal adjustment; budget constraint; government debt; fiscal sustainability analysis; debt reduction; debt accumulation; debt sustainability; central bank; debt stock; budget deficit; fiscal authority; tax rates; budget balance; tax burden; fiscal adjustments; currency crisis; fiscal rule; tax revenues; taxation; sustainable fiscal policy; budget deficits; current account deficits; debt data; account deficits; fiscal variables; government borrowing constraints; primary surplus ratio; government budget; fiscal program; fiscal imbalances; government deficits; tax collection; evolution of debt; currency crises; fiscal rules; government solvency; budget constraints; fiscal policy rule; fiscal data; government budget deficits; fiscal practices; debt management; debt management strategy; sovereign debt; fiscal deficits; fiscal policy decisions; fiscal theory; current account; fiscal policies;

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  1. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
  2. Trehan, Bharat & Walsh, Carl E., 1990. "Seigniorage and tax smoothing in the United States 1914-1986," Journal of Monetary Economics, Elsevier, Elsevier, vol. 25(1), pages 97-112, January.
  3. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
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  11. Adrian Penalver & Gregory Thwaites, 2006. "Fiscal rules for debt sustainability in emerging markets: the impact of volatility and default risk," Bank of England working papers, Bank of England 307, Bank of England.
  12. Bohn, H., 1991. "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 3-91, Wharton School - Weiss Center for International Financial Research.
  13. Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 21(3), pages 291-306, August.
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  17. Enrique G. Mendoza & P. Marcelo Oviedo, 2009. "Public Debt, Fiscal Solvency and Macroeconomic Uncertainty in Latin America The Cases of Brazil, Colombia, Costa Rica and Mexico," Economia Mexicana NUEVA EPOCA, , vol. 0(2), pages 133-173, July-Dece.
  18. Giancarlo Corsetti & Nouriel Roubini, 1991. "Fiscal Deficits, Public Debt and Government Solvency: Evidence from OECD Countries," NBER Working Papers 3658, National Bureau of Economic Research, Inc.
  19. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  20. Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(4), pages 409-17, October.
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  22. Haug, Alfred A, 1991. "Cointegration and Government Borrowing Constraints: Evidence for the United States," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 9(1), pages 97-101, January.
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Citations

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Cited by:
  1. Viviane Luporini, 2014. "Sustainability Of Brazilian Fiscalpolicy, Once Again: Corrective Policy Response Over Time," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Grad 064, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  2. Betty C. Daniel & Christos Shiamptanis, 2010. "Sovereign Default Risk in a Monetary Union," Working Papers, Central Bank of Cyprus 2010-3, Central Bank of Cyprus.
  3. Evan Tanner, 2013. "Fiscal Sustainability," IMF Working Papers 13/89, International Monetary Fund.
  4. Aleksandar Zdravkovic & Aleksandra Bradic-Martinovic, 2012. "Public Debt Sustainability in Western Balkan Countries," Book Chapters, Institute of Economic Sciences.
  5. Fuad Hasanov & Reda Cherif, 2012. "Public Debt Dynamics," IMF Working Papers 12/230, International Monetary Fund.

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