On Fixed and Variable Fiscal Surplus Rules
Fiscal rules are being increasingly used by both emerging and developed economies. This paper analyzes two alternative fiscal policy rules in terms of their impact on debt sustainability: a rule that fixes the ratio of primary surplus to GDP ("fixed surplus rule") and one that sets the primary surplus as a linear function of debt to GDP ratio ("variable surplus rule"). A simple debt dynamics equation, incorporating real shocks, is constructed, and the probability of exceeding the critical debt level is simulated using Monte Carlo techniques. The results show that the variable surplus rule performs better than the simple fixed surplus rule, by reducing debt sustainability concerns and the necessary medium-term primary surplus. This result hinges on the government's ability to make a credible commitment to the variable surplus rule in the medium run.
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- Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997.
"Emerging Market Risk and Sovereign Credit Ratings,"
OECD Development Centre Working Papers
124, OECD Publishing.
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- George Kopits, 2001. "Fiscal Rules; Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 01/145, International Monetary Fund.
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- Teresa Daban Sanchez & Steven A. Symansky & Gian M Milesi-Ferretti & Enrica Detragiache & Gabriel Di Bella, 2003. "Rules-Based Fiscal Policy in France, Germany, Italy, and Spain," IMF Occasional Papers 225, International Monetary Fund.
- Halpern, László & Neményi, Judit, 2002. "Fiscal Foundation of Convergence to European Union in Pre-Accession Transition Countries," Discussion Paper Series 1: Economic Studies 2002,03, Deutsche Bundesbank, Research Centre. Full references (including those not matched with items on IDEAS)
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