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How much is too much? The fiscal space in emerging market economies


  • Ganiko, Gustavo

    (Consejo Fiscal de Perú)

  • Melgarejo, Karl

    (Consejo Fiscal de Perú)

  • Montoro, Carlos

    (Consejo Fiscal de Perú
    Banco Central de Reserva del Perú)


How much fiscal space do emerging market economies have to maintain expansive fiscal policies? This is a key question given the observed increase in public debt since 2007. To answer this question we estimate a debt limit for emerging market economies, from which the public debt to GDP ratio would have an explosive trajectory, in the spirit of Ghosh, Kim, Mendoza, Ostry and Qureshi (2013). For this, we estimate the determinants of the public debt ratio dynamics, the primary balance and the effective cost of debt, for 26 emerging market economies during the 2000-2015 period. We propose an alternative measure, the stochastic debt limit, which takes into account the uncertainty and sensitivity of the debt limit to macroeconomic and financial conditions. The main results are: i) There is evidence of “fiscal fatigue”, namely the loss of control of the debt growth via fiscal adjustments as the debt ratio increases; ii) the debt ratio is an important determinant of the effective cost of public debt; and iii) the debt limit as traditional measured (deterministic) is between 68-97 percentage points of GDP, and between 5-89 percentage points for the stochastic case, which gives evidence of limited fiscal space for the majority of the economies analyzed.

Suggested Citation

  • Ganiko, Gustavo & Melgarejo, Karl & Montoro, Carlos, 2016. "How much is too much? The fiscal space in emerging market economies," Working Papers 2016-014, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2016-014

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    Cited by:

    1. Lankester-Campos, Valerie & Loaiza-Marín, Kerry & Monge-Badilla, Carlos, 2020. "Assessing public debt sustainability for Costa Rica using the fiscal reaction function," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
    2. Adham Jaber, 2022. "Improving the estimates of fiscal space," French Stata Users' Group Meetings 2022 16, Stata Users Group.
    3. Ryota Nakatani, 2021. "Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States," Sustainability, MDPI, vol. 13(6), pages 1-26, March.
    4. Hela Ben Hassine Khalladi, 2019. "Fiscal fatigue, public debt limits and fiscal space in some MENA countries," Economics Bulletin, AccessEcon, vol. 39(2), pages 1005-1017.
    5. Serju-Thomas, Prudence, 2020. "Fiscal sustainability: The case for Jamaica," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
    6. Iancu, Aurel & Olteanu, Dan Constantin, 2023. "Debt Limit, Fiscal Space and Fiscal Fatigue in the Central and Eastern European Countries of EU," Working Papers of National Institute for Economic Research 230629, Institutul National de Cercetari Economice (INCE).

    More about this item


    fiscal policy; fiscal sustainability; fiscal space;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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