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Restoring Debt Sustainability After Crises

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Author Info

  • Emanuele Baldacci
  • Sanjeev Gupta
  • Carlos Mulas-Granados

Abstract

This paper analyzes the experience of 99 advanced and developing economies in restoring fiscal sustainability during 1980 - 2008 after banking crises, which led to large accumulation of public debt. It finds that successful debt reductions have relied chiefly on generation of large primary surpluses in post-crisis years through current expenditure cuts. These savings have been accompanied by growth-promoting measures and a supportive monetary policy stance. While these results are consistent with the existing literature, the paper finds that revenue-raising measures increased the likelihood of successful consolidation in countries that faced large adjustment needs after the crisis. This reflects the fall in effectiveness of spending cuts when deficit reduction needs are large independent of initial tax ratios.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/232.

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Length: 35
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/232

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Keywords: Debt sustainability; Banking crisis; Debt consolidation; Debt reduction; Developed countries; Developing countries; Economic recovery; Fiscal sustainability; Public debt; Revenue measures; Debt rescheduling; fiscal adjustment; fiscal policy; fiscal consolidation; fiscal adjustments; tax revenues; public finances; fiscal consolidations; debt reductions; public finance; fiscal conditions; spending cuts; government debt; debt dynamics; budget composition; budget deficits; fiscal deficits; public spending; fiscal stimulus; expenditure cuts; government deficit; fiscal contractions; fiscal variables; net debt; fiscal adjustment episodes; debt crisis; debt crises; tax ratios; budget balance; fiscal consolidation efforts; debt stock; debt relief; taxation; revenue collection; fiscal indicators; sovereign debt; debt ratios; fiscal deficit; fiscal expansion; fiscal cost; debt service; sovereign bond; primary budget balance; quasi-fiscal activities; ratio of debt; fiscal rule; fiscal policies; fiscal stabilizers; public debt reverse; fiscal measures; fiscal affairs department; tax increases; fiscal policy response; government expenditures; budget consolidation; tax system; budgetary consolidation; tax base; fiscal risk; fiscal activities; tax rates; fiscal vulnerabilities; fiscal savings; fiscal liabilities; fiscal solvency; fiscal health; tax burden; fiscal frameworks; discretionary fiscal policy; public debts; debt threshold; public debt crises; fiscal positions; primary fiscal balance; debt explosions; debt ratio; fiscal institutions; fiscal rules; fiscal consequences; tax policy; low debt; debt management; fiscal data; fiscal balance; debt accumulation; stock of debt; fiscal affairs; fiscal crises; fiscal stability; aggregate demand; budget process; debt thresholds; sovereign debt crises;

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References

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  1. Sebastian Edwards, 2002. "Debt Relief and Fiscal Sustainability," NBER Working Papers 8939, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  3. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  4. Berg, Andrew & Sachs, Jeffrey, 1988. "The debt crisis structural explanations of country performance," Journal of Development Economics, Elsevier, vol. 29(3), pages 271-306, November.
  5. Nouriel Roubini & Paolo Manasse, 2005. "Rules of Thumb for Sovereign Debt Crises," IMF Working Papers 05/42, International Monetary Fund.
  6. Marco Buti & Paul van den Noord, 2003. "Discretionary Fiscal Policy and Elections: The Experience of the Early Years of EMU," OECD Economics Department Working Papers 351, OECD Publishing.
  7. Schiantarelli, Fabio & Perotti, Roberto & Ardagna, Silvia & Alesina, Alberto, 2002. "Fiscal Policy, Profits, and Investment," Scholarly Articles 4685103, Harvard University Department of Economics.
  8. Krueger, Anne O., 1987. "Origins of the developing countries' debt crisis : 1970 to 1982," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 165-187, October.
  9. 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.
  10. Vincent Reinhart & Brian Sack, 2000. "The Economic Consequences of Disappearing Government Debt," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 163-220.
  11. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Vanda Almeida & Gabriela Lopes de Castro & Ricardo Mourinho Félix & José R. Maria, 2011. "Fiscal Consolidation in a Small Euro Area Economy," Working Papers w201105, Banco de Portugal, Economics and Research Department.
  2. Luigi, Bernardi, 2011. "Economic crisis and taxation in Europe," MPRA Paper 31007, University Library of Munich, Germany.
  3. Niamh Hardiman, 2013. "Rethinking the political economy of fiscal consolidation in two recessions in Ireland," Working Papers 201316, Geary Institute, University College Dublin.
  4. David Lodge & Marta Rodriguez-Vives, 2013. "How long can austerity persist? The factors that sustain fiscal consolidations," European Journal of Government and Economics, Europa Grande, vol. 2(1), pages 5-24, June.
  5. Borys, Paweł & Ciżkowicz, Piotr & Rzońca, Andrzej, 2013. "Panel data evidence on effects of fiscal impulses in the EU New Member States," MPRA Paper 48243, University Library of Munich, Germany.

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