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Refinements to the probabilistic approach to fiscal sustainability analysis

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  • Frank, Nathaniel
  • Ley, Eduardo

Abstract

This paper relaxes some key assumptions in the probabilistic approach to fiscal sustainability. First, the authors identify structural breaks over the sample period used to estimate the covariance matrix of the shocks to the debt ratios. Second, the assumption of normality of the shocks is dropped by modeling their respective empirical distribution directly, which makes it possible to quantify asymetries and thick tails. Third, the use of fiscal reaction functions is avoided by focusing attention on debt-stabilizing balances.

Suggested Citation

  • Frank, Nathaniel & Ley, Eduardo, 2008. "Refinements to the probabilistic approach to fiscal sustainability analysis," Policy Research Working Paper Series 4709, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4709
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    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/09/04/000158349_20080904081618/Rendered/PDF/WPS4709.pdf
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    References listed on IDEAS

    as
    1. Bandiera, Luca & Budina, Nina & Klijn, Michel & van Wijnbergen, Sweder, 2007. "The"how to"of fiscal sustainability : a technical manual for using the fiscal sustainability tool," Policy Research Working Paper Series 4170, The World Bank.
    2. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
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    Keywords

    Debt Markets; Economic Theory&Research; Emerging Markets; External Debt;

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