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Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries

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Author Info

  • Oya Celasun
  • Xavier Debrun
  • Jonathan David Ostry

Abstract

This paper proposes a probabilistic approach to public debt sustainability analysis (DSA) using "fan charts." These depict the magnitude of risks-upside and downside-surrounding public debt projections as a result of uncertain economic conditions and policies. We propose a simulation algorithm for the path of public debt under realistic shock configurations, combining pure economic disturbances (to growth, interest rates, and exchange rates), the endogenous policy response to these, and the possible shocks arising from fiscal policy itself. The paper emphasizes the role of fiscal behavior, as well as the structure of disturbances facing the economy and due to fiscal policy, in shaping the risk profile of public debt. Fan charts for debt are derived from the "marriage" between the pattern of shocks on the one hand and the endogenous response of fiscal policy on the other. Applications to Argentina, Brazil, Mexico, South Africa, and Turkey are used to illustrate the approach and its limitations.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/67.

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Length: 54
Date of creation: 01 Mar 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/67

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Keywords: Emerging markets; public debt; fiscal policy; equation; correlation; fiscal reaction; fiscal reaction function; probability; fiscal behavior; fiscal reaction functions; calibration; statistics; frequency distributions; fiscal cost; sample bias; fiscal adjustment; fiscal costs; financial statistics; calibrations; probabilities; equations; fiscal balance; fiscal effort; forecasting; confidence interval; correlations; covariances; difference equation; foreign debt; probability distributions; time series; standard errors; fiscal policy process; primary fiscal balance; dynamic models; dummy variable; covariance; instrumental variables; budget constraint; fiscal response; econometrics; confidence intervals; fiscal data; standard error; empirical model; monte carlo simulations; fiscal adjustment efforts; standard deviations; fiscal affairs; statistic; fixed effects estimator; estimation of equation; fiscal authorities; fiscal policy adjustments; dummy variables; standard deviation; fiscal policy response; mathematical statistics; normal distribution; fiscal economists; interest expenditure; fiscal policy responses; fiscal balances; sensitivity analysis; fiscal management; fiscal disturbance; fiscal affairs department; fiscal surpluses; fiscal reactions; fiscal policies; orthogonality; fiscal affairs departments; predictions; fiscal expansions; prudent fiscal management; fiscal rules; fiscal contractions; arithmetic; number of parameters; linear model; fiscal reforms; fiscal sustainability; survey; fiscal solvency; simulation results; frequency distribution; government budget; budget surplus; fiscal studies; fiscal disturbances; causation; constant term; samples; stochastic analysis; fiscal rule; fiscal expenditures; instrumental variable; fiscal policy recommendations; fiscal performance; primary deficit; statistical significance; fiscal variables; fiscal shocks;

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  1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 115-143, August.
  2. Carlo A. Favero, . "How do European monetary and fiscal authorities behave?," Working Papers 214, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  12. Fabrizio Balassone & Maura Francese, 2004. "Cyclical asymmetry in fiscal policy, debt accumulation and the Treaty of Maastricht," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 531, Bank of Italy, Economic Research and International Relations Area.
  13. Cragg, John G. & Donald, Stephen G., 1993. "Testing Identifiability and Specification in Instrumental Variable Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 9(02), pages 222-240, April.
  14. Antonio Fat·s & Ilian Mihov, 2003. "On Constraining Fiscal Policy Discretion in EMU," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 19(1), pages 112-131.
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