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Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

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  • Atish R. Ghosh
  • Jun I. Kim
  • Enrique G. Mendoza
  • Jonathan D. Ostry
  • Mahvash S. Qureshi

Abstract

How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic ability-to-pay model of sovereign default in which risk-neutral investors lend to a government that displays “fiscal fatigue,” because its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled-over. Using data for 23 advanced economies over 1970–2007, we find evidence of a fiscal reaction function with these features, and use it to compute “fiscal space,” defined as the difference between projected debt ratios and debt limits.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16782.

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Date of creation: Feb 2011
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Handle: RePEc:nbr:nberwo:16782

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References

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  1. Mark Aguiar & Gita Gopinath, 2004. "Defaultable Debt, Interest Rates and the Current Account," NBER Working Papers 10731, National Bureau of Economic Research, Inc.
  2. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
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Cited by:
  1. Eric M. Leeper & Todd B. Walker, 2011. "Fiscal Limits in Advanced Economies," Economic Papers, The Economic Society of Australia, vol. 30(1), pages 33-47, 03.
  2. Andrew Hughes Hallett & Juan Martinez Oliva, 2012. "Reducing Global Imbalances: Can Fixed Exchange Rates and Current Account Limits Help?," Open Economies Review, Springer, vol. 23(1), pages 163-192, February.
  3. Jasper Lukkezen & Hugo Rojas-Romagosa, 2012. "When is debt sustainable?," CPB Discussion Paper 212, CPB Netherlands Bureau for Economic Policy Analysis.
  4. Joshua Aizenman & Yothin Jinjarak, 2012. "Income inequality, tax base and sovereign spreads," NBER Working Papers 18176, National Bureau of Economic Research, Inc.
  5. Carlo Favero & Francesco Giavazzi & Jacopo Perego, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," IMF Economic Review, Palgrave Macmillan, vol. 59(4), pages 652-682, November.
  6. Andrew Hughes Hallett & Juan Carlos Martinez Oliva, 2013. "The Importance of Trade and Capital Imbalances in the European Debt Crisis," Working Paper Series WP13-1, Peterson Institute for International Economics.
  7. Joshua Aizenman & Yothin Jinjarak, 2011. "The Fiscal Stimulus of 2009-2010: Trade Openness, Fiscal Space, and Exchange Rate Adjustment," NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pages 301-342 National Bureau of Economic Research, Inc.
  8. Hallett, Andrew Hughes & Oliva, Juan Carlos Martinez, 2011. "Global Imbalances in a World of Inflexible Real Exchange Rates and Capital Controls," ADBI Working Papers 330, Asian Development Bank Institute.
  9. Andrew Berg & Rafael Portillo & Edward F. Buffie & Catherine A. Pattillo & Luis-Felipe Zanna, 2012. "Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces," IMF Working Papers 12/144, International Monetary Fund.
  10. Christos Shiamptanis, 2012. "Risk Assessment Under a Non-linear Fiscal Rule," Working Papers 038, Ryerson University, Department of Economics.
  11. Cristina Checherita-Westphal & Andrew Hughes Hallett & Philipp Rother, 2012. "Fiscal sustainability using growth-maximising debt targets," Working Paper Series 1472, European Central Bank.
  12. Juan Carlos Hatchondo & Francisco Roch & Leonardo Martinez, 2012. "Fiscal Rules and the Sovereign Default Premium," IMF Working Papers 12/30, International Monetary Fund.
  13. Andrew Hughes Hallett & Svend Jensen, 2011. "Stable and enforceable: a new fiscal framework for the Euro area," International Economics and Economic Policy, Springer, vol. 8(3), pages 225-245, September.

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