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Assessing Fiscal Sustainability With Alternative Methodologies

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    This paper applies and analyzes three alternative methodologies to assess fiscal sustainability of the central government´s debt, using as illustrative examples the cases of Colombia and Costa Rica: The IMF´s (2003 a); the Mendoza & Oviedo´s (2003); and a new methodology that incorporates the effects of the structural and cyclical components of output, government expenditures, and revenues, on the evolution of debt, with a particular indicator of debt sustainability based on the structural components, as long as the cyclical component of debt balances out along the full cycle. In addition, a methodology to estimate the probability of default of debt and to treat the interest rate as a function of that probability is developed and applied. The common characteristic of the three approaches is the explicit incorporation of uncertainty about the behavior of the variables determining the evolution of the government´s debt, and the formulation of specific indicators that capture the effect of volatility in the economy, as well as their incidence on fiscal and financial variables. In addition, the three methodologies applied use specific procedures to estimate the expected value of the relevant variables. The results, particularly those expressed in terms of the probabilities of default, constitute useful analytical tools for policy makers to foresee the wideness of the period available to undertake corrective fiscal policies, which are explicitly characterized along the paper.

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    Volume (Year): 22 (2004)
    Issue (Month): 46-1 (December)
    Pages: 82-145

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    Handle: RePEc:col:000107:002030
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    1. Humberto Mora A., 2002. "Sostenibilidad de la deuda del gobierno en los países miembros del FLAR," COYUNTURA ECONÓMICA, FEDESARROLLO, December.
    2. World Bank, 2003. "Brazil : Stability for Growth and Poverty Reduction," World Bank Other Operational Studies 14881, The World Bank.
    3. P. Marcelo Oviedo & Enrique Mendoza, 2004. "Public Debt, Fiscal Solvency, and Macroeconomic Uncertainty in Emerging Markets: The Tale of the Tormented Insurer," Econometric Society 2004 North American Summer Meetings 647, Econometric Society.
    4. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    5. Ernesto Talvi & Carlos A. Végh, 1998. "Fiscal Policy Sustainability: A Basic Framework," Research Department Publications 3070, Inter-American Development Bank, Research Department.
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