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Public Debt Targeting An Application to the Caribbean

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  • International Monetary Fund

Abstract

This paper proposes a fiscal policy framework we call Public Debt Targeting. The framework seeks to smooth primary spending over the business cycle while remaining consistent with public debt sustainability. Under the proposed framework, a government announces a commitment to a public debt band trajectory over the medium term, while sequentially announcing primary expenditures for the next budget cycle, which are determined recursively based on the history of shocks. Public debt targeting differs from a structural balance rule in that it internalizes the effect of the deterioration in creditworthiness from fiscal deficits and public debt accumulation, which tend to affect sovereign spreads, interest rates, exchange rates, and economic activity. The proposed framework is applied to Caribbean economies, which in general show high levels of public debt and procyclical primary expenditure.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/203.

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Length: 38
Date of creation: 01 Aug 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/203

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Keywords: Economic models; Government expenditures; public debt; primary expenditure; fiscal policy; debt accumulation; debt sustainability; aggregate demand; fiscal framework; fiscal rules; debt dynamics; government spending; sovereign debt; expenditure growth; domestic currency; fiscal policy framework; debt obligations; debt threshold; fiscal sustainability; excessive debt; fiscal deficits; government expenditure; debt thresholds; fiscal stance; government debt; discretionary fiscal policy; government deficit; fiscal surpluses; fiscal council; budget deficits; fiscal affairs department; commercial debt; terms of debt; fiscal behavior; debt reduction; debt stock; international lending; government deficits; interest expenditure; fiscal affairs; excessive deficits; debt structure; national budget; debt crisis; government bailout; fiscal revenues; debt problems; tax base; foreign currency debt; fiscally sustainable; budget projections; fiscal balances; sovereign debtor; fiscal policies; fiscal imbalances; foreign borrowing; fiscal discipline; fiscal policy rules; fiscal finances; budget projection; expenditure increase; sovereign defaults; fiscal consolidation; fiscal projections; fiscal resources; reserve bank; public spending; structural fiscal; public expenditure; debt ratio; fiscal institutions; domestic debt; expenditure adjustment; debt stocks; fiscal policy prescriptions; fiscal prudence; amount of debt; fiscal consolidations; stock of debt; keynesian fiscal policy; debt intolerance; currency debt; domestic financial markets; market debt; fiscal policy management; fiscal balance; budget process; taxation; fiscal performance; fiscal accounting; fiscal policy outcomes; tax policy; debt management;

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  1. 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.
  2. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
  3. Bennett Sutton & Luis Catão, 2002. "Sovereign Defaults," IMF Working Papers 02/149, International Monetary Fund.
  4. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
  5. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
  6. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  7. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  8. Tanner, Evan, 2004. "Fiscal rules and countercyclical policy: Frank Ramsey meets Gramm-Rudman-Hollings," Journal of Policy Modeling, Elsevier, vol. 26(6), pages 719-731, September.
  9. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  10. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  11. Aizenman, Joshua & Hausmann, Ricardo, 2000. "The impact of inflation on budgetary discipline," Journal of Development Economics, Elsevier, vol. 63(2), pages 425-449, December.
  12. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
  13. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
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