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Fiscal fragility: what the past may say about the future

  • Joshua Aizenman
  • Gurnain Kaur Pasricha

The end of the great moderation has profound implications on the assessment of fiscal sustainability. The pertinent issue goes beyond the obvious increase in the stock of public debt/GDP induced by the global recession, to include the neglected perspective that the vulnerabilities associated with a given public debt/GDP increase with the future volatility of key economic variables. We evaluate for a given future projected public debt/GDP, the possible distribution of the fiscal burden or the flow cost of funding debt for each OECD country, assuming that this in future decades resembles that in the past four decades. Fiscal projections may be alarmist if one jumps from the priors of great moderation to the prior of permanent high future burden. Prudent adjustment for countries exposed to heightened vulnerability may entail both short term stabilization and forward looking fiscal reforms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16478.

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Date of creation: Oct 2010
Date of revision:
Handle: RePEc:nbr:nberwo:16478
Note: IFM ME
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  1. Frederic S. Mishkin, 1981. "The Real Interest Rate: An Empirical Investigation," NBER Working Papers 0622, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  3. William Easterly & Michael Kremer & Lant Pritchett & Lawrence H. Summers, 1993. "Good Policy or Good Luck? Country Growth Performance and Temporary Shocks," NBER Working Papers 4474, National Bureau of Economic Research, Inc.
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