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International Evidenceon Fiscal Solvency

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  • Enrique G. Mendoza
  • Jonathan David Ostry

Abstract

This paper looks at fiscal solvency and public debt sustainability in both emerging market and advanced countries. Evidence of fiscal solvency, in the form of a robust positive conditional relationship between public debt and the primary fiscal balance, is established in both groups of countries. Evidence of fiscal solvency is much weaker, however, at high debt levels. These findings suggest that many industrial and emerging market economies, including several where fiscal solvency has been the subject of recent debates, appear to conduct fiscal policy responsibly. Yet our results cannot reject the hypothesis of fiscal insolvency in groups of countries with high debt ratios.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/56.

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Length: 30
Date of creation: 01 Mar 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/56

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Keywords: Fiscal policy; Debt sustainability; public debt; debt ratio; fiscal solvency; debt ratios; low debt; fiscal policies; government spending; budget constraint; government expenditures; government budget constraint; government budget; fiscal sustainability; government debt; fiscal discipline; debt data; fiscal balances; fiscal variables; primary fiscal balance; debt service; fiscal balance; fiscal data; fiscal policy debt; debt crises; debt management; fiscal responsibility; fiscal authority; budget deficits; average debt ratios; tax base; fiscal stringency; national budget; responsible ? fiscal policy; debt dynamics; budget constraints; debt market; fiscal flows; taxation; fiscal economists; sovereign defaults;

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References

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  1. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  2. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal taxation without state-contingent debt," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
  3. Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy Often Procyclical?," NBER Working Papers 11600, National Bureau of Economic Research, Inc.
  4. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(1), pages 257-71, February.
  5. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 940-71, October.
  6. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
  7. Bennett Sutton & Luis Catão, 2002. "Sovereign Defaults," IMF Working Papers 02/149, International Monetary Fund.
  8. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 3.
  9. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 78(1), pages 156-190, October.
  10. Oya Celasun & Xavier Debrun & Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries," IMF Working Papers 06/67, International Monetary Fund.
  11. Enrique G. Mendoza & P. Marcelo Oviedo, 2006. "Fiscal Policy and Macroeconomic Uncertainty in Developing Countries: The Tale of the Tormented Insurer," NBER Working Papers 12586, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. António Afonso & Priscilla Toffano, 2013. "Fiscal regimes in the EU," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2013/10, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  2. Joseph P. Byrne & Norbert Fiess & Ronald MacDonald, 2008. "The Global Dimension to Fiscal Sustainability," Working Papers, Business School - Economics, University of Glasgow 2008_10, Business School - Economics, University of Glasgow.
  3. C. Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2012. "On the Solvency of Nations: Cross-Country Evidence on the Dynamics of External Adjustment," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1218, Koc University-TUSIAD Economic Research Forum.
  4. Ante Žigman & Boris Cota, 2011. "The impact of fiscal policy on government bond spreads in emerging markets," Financial Theory and Practice, Institute of Public Finance, Institute of Public Finance, vol. 35(4), pages 385-412.
  5. Axel Schimmelpfennig & E. H. Gardner, 2008. "Lebanon-Weathering the Perfect Storms," IMF Working Papers 08/17, International Monetary Fund.
  6. Byrne, Joseph P. & Fiess, Norbert & MacDonald, Ronald, 2008. "The Global Dimension to Fiscal Sustainability," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2008-14, Scottish Institute for Research in Economics (SIRE).
  7. Raghbendra Jha, 2007. "Fiscal Policy in Developing Countries: A Synoptic View," ASARC Working Papers, The Australian National University, Australia South Asia Research Centre 2007-01, The Australian National University, Australia South Asia Research Centre.
  8. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers, Bank of England 484, Bank of England.

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