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Fiscal Sustainability; A 21st Century Guide for the Perplexed

  • Evan Tanner
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    This paper critically reviews recent work regarding the sustainability of public debt. It argues that Debt Sustainability Analyses (DSAs) should be more than mere mechanical simulation exercises. Instead, a DSA should be linked to some objective regarding the distribution of fiscal burdens and distortions over time (in the tradition of Barro’s 1979 tax smoothing objective). The paper discusses objective functions that yield simple and transparent fiscal policy rules.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/89.

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    Length: 49
    Date of creation: 22 Apr 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/89
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    1. Rick Van der Ploeg & Tony Venables, 2011. "Harnessing windfall revenues: Optimal policies for resource-rich developing economies," Economics Series Working Papers 543, University of Oxford, Department of Economics.
    2. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
    3. Lloyd-Ellis, Huw & Zhan, Shiqiang & Zhu, Xiaodong, 2005. "Tax Smoothing with Stochastic Interest Rates: A Reassessment of Clinton's Fiscal Legacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(4), pages 699-724, August.
    4. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
    5. Kingston, Geoffrey, 1991. "Should Marginal Tax Rates Be Equalized Through Time?," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 911-24, August.
    6. Ley, Eduardo, 2009. "Fiscal (and external) sustainability," MPRA Paper 13693, University Library of Munich, Germany.
    7. Garcia, Carlos J. & Restrepo, Jorge E. & Tanner, Evan, 2011. "Fiscal rules in a volatile world: A welfare-based approach," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 649-676, July.
    8. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework; Incorporating Balance Sheets and Uncertainty," IMF Working Papers 08/40, International Monetary Fund.
    9. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
    10. Nathaniel Frank & Eduardo Ley, 2009. "On the Probabilistic Approach to Fiscal Sustainability: Structural Breaks and Non-Normality," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 742-757, November.
    11. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
    12. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
    13. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
    14. Evan Tanner & Issouf Samake, 2008. "Probabilistic Sustainability of Public Debt: A Vector Autoregression Approach for Brazil, Mexico, and Turkey," IMF Staff Papers, Palgrave Macmillan, vol. 55(1), pages 149-182, April.
    15. repec:spo:wpecon:info:hdl:2441/8607 is not listed on IDEAS
    16. Bennett T. McCallum, 1982. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," NBER Working Papers 0905, National Bureau of Economic Research, Inc.
    17. Gabriel Talmain, . "An Analytical Approximate Solution to the Problem of Precautionary Savings," Discussion Papers 98/4, Department of Economics, University of York.
    18. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    19. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: stochastic simulations of the core model," Reserve Bank of New Zealand Discussion Paper Series G98/6, Reserve Bank of New Zealand.
    20. Jagadeesh Gokhale & Kent Smetters, 2003. "Fiscal and generational imbalances: new budget measures for new budget priorities," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Dec.
    21. Boskin, Michael J, et al, 1985. "New Estimates of the Value of Federal Mineral Rights and Land," American Economic Review, American Economic Association, vol. 75(5), pages 923-36, December.
    22. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," NBER Working Papers 16782, National Bureau of Economic Research, Inc.
    23. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    24. Evan Tanner & Kevin Joseph Carey, 2005. "The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output," IMF Working Papers 05/207, International Monetary Fund.
    25. Enrique G. Mendoza & P. Marcelo Oviedo, 2006. "Fiscal Policy and Macroeconomic Uncertainty in Developing Countries: The Tale of the Tormented Insurer," NBER Working Papers 12586, National Bureau of Economic Research, Inc.
    26. Eisner, Robert & Pieper, Paul J, 1986. "A New View of the Federal Debt and Budget Deficits: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1156-57, December.
    27. Evan Tanner & Alberto M. Ramos, 2002. "Fiscal Sustainability and Monetary Versus Fiscal Dominance; Evidence From Brazil, 1991-2000," IMF Working Papers 02/5, International Monetary Fund.
    28. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
    29. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter.
    30. Michael Kumhof & Evan Tanner, 2005. "Government Debt: A Key Role in Financial Intermediation," IMF Working Papers 05/57, International Monetary Fund.
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