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The Cost of Future Policy: Intertemporal Public Sector Balance Sheets in the G7

Author

Listed:
  • Yugo Koshima
  • Jason Harris
  • Alexander F. Tieman
  • Alessandro De Sanctis

Abstract

This paper compiles the Intertemporal Public Sector Balance Sheets for all G7 countries and examines their relationship with government borrowing costs. In 2018, all G7 countries have negative Intertemporal Net Financial Worth (INFW), falling short of their intertemporal budget constraint. A decomposition of the evolution of INFW shows that short-term fluctuations are mainly driven by fiscal policy changes, while in the long run demographic changes and health and pension obligations play a larger role. We find that on average a 10 percentage point of GDP increase in INFW reduces the (future) 10-1 year sovereign yield curve spread by 2.8 basis points. This results suggest that financial markets pay attention to governments’ future policy obligations, in addition to its current assets and liabilities.

Suggested Citation

  • Yugo Koshima & Jason Harris & Alexander F. Tieman & Alessandro De Sanctis, 2021. "The Cost of Future Policy: Intertemporal Public Sector Balance Sheets in the G7," IMF Working Papers 2021/128, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/128
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    Keywords

    balance sheet framework; negative Intertemporal Net Financial Worth; INFW 0; evolution of INFW; INTERTEMPORAL NET; Financial statements; Health care spending; Fiscal stance; Pension spending; Global;
    All these keywords.

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