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Analyzing Fiscal Sustainability

Author

Listed:
  • Huixin Bi
  • Eric M. Leeper

Abstract

The authors study the implications of fiscal policy behaviour for sovereign risk in a framework that determines a country’s fiscal limit, the point at which, for economic or political reasons, taxes and spending can no longer adjust to stabilize debt. A real business cycle model maps the economic environment - expected fiscal policy, the distribution of exogenous disturbances and private agents’ behaviour - into a distribution for the maximum sustainable debt-to-GDP ratio. Default is possible at any point on this fiscal limit distribution. Calibrations of the model to Greek and Swedish data illustrate how the framework can be used to study actual fiscal reforms undertaken by developed economies facing sovereign risk pressures.

Suggested Citation

  • Huixin Bi & Eric M. Leeper, 2013. "Analyzing Fiscal Sustainability," Staff Working Papers 13-27, Bank of Canada.
  • Handle: RePEc:bca:bocawp:13-27
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Leonardo Martinez & Francisco Roch & Juan Hatchondo, 2015. "Fiscal rules and the sovereign default premium," 2015 Meeting Papers 1262, Society for Economic Dynamics.
    2. Sören Radde & Cristina Checherita-Westphal & Wei Cui, 2015. "Government Bond Liquidity and Sovereign-Bank Interlinkages," SFB 649 Discussion Papers SFB649DP2015-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Van Loo, Ellen J. & Caputo, Vincenzina & Nayga, Rodolfo M. & Verbeke, Wim, 2014. "Consumers’ valuation of sustainability labels on meat," Food Policy, Elsevier, vol. 49(P1), pages 137-150.
    4. Zuzana Mucka, 2015. "Is the Maastricht debt limit safe enough for Slovakia?," Working Papers Working Paper No. 2/2015, Council for Budget Responsibility.
    5. Gerhard Glomm & Juergen Jung & Chung Tran, 2012. "Fiscal Austerity Measures: Spending Cuts vs. Tax Increases," ANU Working Papers in Economics and Econometrics 2012-594, Australian National University, College of Business and Economics, School of Economics.
    6. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2015. "Fiscal rules and the Sovereign Default Premium," Caepr Working Papers 2015-010 Classification-F, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    7. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    8. G. Lamé & M. Lequien & P.-A. Pionnier, 2014. "Interpretation and limits of sustainability tests in public finance," Applied Economics, Taylor & Francis Journals, vol. 46(6), pages 616-628, February.

    More about this item

    Keywords

    Economic models; Fiscal Policy;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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