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Signaling Fiscal Regime Sustainability

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  • Alessandro Prati
  • Francesco Drudi

Abstract

This paper proposes a signaling model that offers a new perspective on why governments deviate from optimal tax smoothing and delay debt stabilization. In our model, dependable—but not fully credible—governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock of debt has been accumulated). At this point, they may deviate from tax smoothing not to be mimicked by weak governments. The model predicts that primary balances and debt stocks are complementary inputs in the credit rating function as tests on Italian, Irish, Belgian, and Danish data show.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 99/86.

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Length: 38
Date of creation: 01 Jul 1999
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Handle: RePEc:imf:imfwpa:99/86

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References

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  7. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  8. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-85, May.
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Citations

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Cited by:
  1. Benigno, Pierpaolo & Missale, Alessandro, 2001. "High Public Debt in Currency Crises: Fundamentals versus Signalling Effects," CEPR Discussion Papers 2862, C.E.P.R. Discussion Papers.
  2. Castriota, Stefano & Delmastro, Marco, 2008. "Individual and Collective Reputation: Lessons from the Wine Market," Working Papers 45504, American Association of Wine Economists.
  3. Alessandro Prati & Francesco Drudi, 1999. "Signaling Fiscal Regime Sustainability," IMF Working Papers 99/86, International Monetary Fund.
  4. Siviero, S. & Terlizzese, D. & Visco, I., 1999. "Are Model-Based Inflation Forecasts Used in Monetary Policymaking? A Case Study," Papers 357, Banca Italia - Servizio di Studi.
  5. Silvia Ardagna & Francesco Caselli & Timothy Lane, 2005. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," CEP Discussion Papers dp0670, Centre for Economic Performance, LSE.
  6. Samir Jahjah, 2001. "Financial Stability and Fiscal Crises in a Monetary Union," IMF Working Papers 01/201, International Monetary Fund.
  7. Drudi, Francesco & Giordano, Raffaela, 2000. "Default risk and optimal debt management," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 861-891, June.
  8. World Bank, 2004. "Grenada, OECS Fiscal Issues : Policies to Achieve Fiscal Sustainability and Improve Efficiency and Equity of Public Expenditures," World Bank Other Operational Studies 13939, The World Bank.
  9. Fiess, Norbert, 2003. "Capital flows, country risk, and contagion," Policy Research Working Paper Series 2943, The World Bank.
  10. Marchesi, S., 2000. "Buybacks of Domestic Debt in Public Debt Management," The Warwick Economics Research Paper Series (TWERPS) 573, University of Warwick, Department of Economics.

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