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Fiscal Sustainability: A Cross-Country Analysis

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  • Huixin Bi

Abstract

Since the global financial crisis, public debt has risen rapidly in many advanced and emerging market economies. Every country faces a fiscal limit at which taxes and spending can no longer adjust to stabilize debt. But quantifying fiscal limits can be challenging. Different countries have different capacities to service their debt. Moreover, two countries with similar debt levels may face drastically different default risks. {{p}} Huixin Bi introduces a new, country-specific framework of fiscal limits to quantify the maximum level of debt a government can sustain given its economic and policy environment. She finds that countries with relatively low government expenditures have significantly higher fiscal limits than countries with relatively high government expenditures. She also finds that sovereign default risks rise rapidly during an economic downturn, suggesting that debt levels viewed as safe in good times can quickly become unsustainable.

Suggested Citation

  • Huixin Bi, 2017. "Fiscal Sustainability: A Cross-Country Analysis," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-35.
  • Handle: RePEc:fip:fedker:00059
    DOI: 10.18651/ER/4q17Bi
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    File URL: https://doi.org/10.18651/ER/4q17Bi
    File Function: https://doi.org/10.18651/ER/4q17Bi
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    References listed on IDEAS

    as
    1. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    2. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
    3. Huixin Bi & Eric M. Leeper, 2013. "Analyzing Fiscal Sustainability," Staff Working Papers 13-27, Bank of Canada.
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    Cited by:

    1. Jing, Rui & Wang, Meng & Brandon, Nigel & Zhao, Yingru, 2017. "Multi-criteria evaluation of solid oxide fuel cell based combined cooling heating and power (SOFC-CCHP) applications for public buildings in China," Energy, Elsevier, vol. 141(C), pages 273-289.

    More about this item

    Keywords

    Government expenditures; Fiscal sustainability; Fiscal limits; Debt;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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