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Fiscal Space


  • Jonathan David Ostry
  • Atish R. Ghosh
  • Jun I Kim
  • Mahvash S Qureshi


In this note, the authors reexamine the issue of debt sustainability in a large group of advanced economies. Their hypothesis is that, when debt is in a moderate range, its dynamics are sustainable in the sense that increases in debt elicit sufficient increases in primary fiscal balances to stabilize the debt-to-GDP ratio. At high debt levels, however, the dynamics may turn unstable, and the debt ratio may not converge to a finite level. Such a framework allows the authors to define a “debt limit” that is consistent with a country’s historical track record of adjustment in the sense that, without an extraordinary fiscal effort, any debt increment beyond this limit would cause debt to increase without bound. This debt limit is not an absolute and immutable barrier, however, but rather defines a critical point above which a country’s normal fiscal response to rising debt becomes insufficient to maintain debt sustainability. Nor should this debt limit be interpreted as being in any sense the optimal level of public debt. Indeed, since this limit delineates the point at which fiscal solvency is called into question—and the analysis abstracts entirely from liquidity/rollover risk—prudence dictates that countries will typically want to be well below their debt limit. Given a country’s normal pattern of adjustment, “fiscal space” is then simply the difference between its debt limit and its current level of debt.

Suggested Citation

  • Jonathan David Ostry & Atish R. Ghosh & Jun I Kim & Mahvash S Qureshi, 2010. "Fiscal Space," IMF Staff Position Notes 2010/11, International Monetary Fund.
  • Handle: RePEc:imf:imfspn:2010/11

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    References listed on IDEAS

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    Cited by:

    1. Bevan, David L., 2012. "Aid, Fiscal Policy, Climate Change, and Growth," WIDER Working Paper Series 077, World Institute for Development Economic Research (UNU-WIDER).
    2. Gerdie Everaert, 2017. "On the estimation of panel fiscal reaction functions : Heterogeneity or fiscal fatigue?," Working Paper Research 320, National Bank of Belgium.
    3. repec:unu:wpaper:wp2012-77 is not listed on IDEAS
    4. Menzie Chinn, 2011. "Comment on "The Fiscal Stimulus in 2009-11: Trade Openness, Fiscal Space and Exchange Rate Adjustment"," NBER Chapters,in: NBER International Seminar on Macroeconomics 2011, pages 343-347 National Bureau of Economic Research, Inc.
    5. Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
    6. Marta Gómez-Puig & Simón Javier Sosvilla-Rivero, 2016. "Debt-growth linkages in EMU across countries and time horizons," Working Papers del Instituto Complutense de Estudios Internacionales 1602, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
    7. John Creedy & Grant Scobie, 2017. "Debt projections and fiscal sustainability with feedback effects," New Zealand Economic Papers, Taylor & Francis Journals, vol. 51(3), pages 237-261, September.
    8. Marco Battaglini & Stephen Coate, 2011. "Fiscal Policy and Unemployment," NBER Working Papers 17562, National Bureau of Economic Research, Inc.
    9. Hippolyte W. Balima & Eric G. Kilama & Rene Tapsoba, 2017. "Settling the Inflation Targeting Debate: Lights from a Meta-Regression Analysis," IMF Working Papers 17/213, International Monetary Fund.
    10. Mark Allen, 2011. "Fiscal Policy Options in light of Recent IMF Research," CASE Network Studies and Analyses 421, CASE-Center for Social and Economic Research.
    11. Libich, Jan & Nguyen, Dat Thanh & Stehlík, Petr, 2015. "Monetary exit and fiscal spillovers," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 184-206.
    12. Cuerpo, Carlos & Drumond, Inês & Lendvai, Julia & Pontuch, Peter & Raciborski, Rafal, 2015. "Private sector deleveraging in Europe," Economic Modelling, Elsevier, vol. 44(C), pages 372-383.
    13. Alfredo Calcagno, 2012. "Can austerity work?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(0), pages 24-36.
    14. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2013. "Fiscal space and sovereign risk pricing in a currency union," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 131-163.
    15. Peat, Maurice & Svec, Jiri & Wang, Jue, 2015. "The effects of fiscal opacity on sovereign credit spreads," Emerging Markets Review, Elsevier, vol. 24(C), pages 34-45.
    16. Marcelo Bianconi & Walter H. Fisher, 2014. "Intertemporal Budget Policies and Macroeconomic Adjustment in Indebted Open Economies," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 116-130, February.
    17. Martin Bruns & Tigran Poghosyan, 2016. "Leading Indicators of Fiscal Distress; Evidence from the Extreme Bound Analysis," IMF Working Papers 16/28, International Monetary Fund.
    18. Mundle, Sudipto & M.Govinda Rao & Bhanumurthy, N.R., 2011. "Stimulus, Recovery and Exit Policy G20 Experience and Indian Strategy," Working Papers 11/85, National Institute of Public Finance and Policy.


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