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Assessing public debt sustainability for Costa Rica using the fiscal reaction function

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  • Lankester-Campos, Valerie
  • Loaiza-Marín, Kerry
  • Monge-Badilla, Carlos

Abstract

This paper assesses Costa Rica's public debt sustainability empirically using three complementary approaches: the calculation of the debt-stabilizing primary fiscal balance obtained from the government's intertemporal budget constraint, the estimation of the parameters of a fiscal policy reaction function (FRF) following the methodology originally proposed by proposed by Bohn (2007); and the estimation of fan charts for the primary fiscal balance and public debt expressed as shares of GDP following the approach proposed by Celasun et al. (2006). With annual data from the period 1974–2018, we find that debt has been unsustainable for specific long- and short-term episodes. For the most recent observations, the conclusion is that debt trajectory is unsustainable. Given that a major fiscal reform was approved at the end of 2018, an uncertainty evaluation of its impact on the primary balance's adjustment path until 2023 and 2030 is included using the official estimated reform projections. The results indicate that the maximum level of the debt ratio will be 68% in 2026, after which this upward trend reverses.

Suggested Citation

  • Lankester-Campos, Valerie & Loaiza-Marín, Kerry & Monge-Badilla, Carlos, 2020. "Assessing public debt sustainability for Costa Rica using the fiscal reaction function," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
  • Handle: RePEc:eee:lajcba:v:1:y:2020:i:1:s2666143820300144
    DOI: 10.1016/j.latcb.2020.100014
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    References listed on IDEAS

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    Cited by:

    1. Shiv Shankar & Pushpa Trivedi, 2023. "Assessing India’s fiscal sustainability considering debt–deficit and financing dynamics," Indian Economic Review, Springer, vol. 58(1), pages 41-70, June.

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    More about this item

    Keywords

    Debt sustainability; Primary balance; Fiscal reaction function; Risk assessment; Fan chart;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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