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On Fixed and Variable Fiscal Surplus Rules

Author

Listed:
  • Erdem Basci

    (Central Bank of the Republic of Turkey)

  • Mehmet Fatih Ekinci

    (University of Houston)

  • Murat Yulek

    (IMF)

Abstract

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.

Suggested Citation

  • Erdem Basci & Mehmet Fatih Ekinci & Murat Yulek, 2004. "On Fixed and Variable Fiscal Surplus Rules," Macroeconomics 0409006, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0409006 Note: Type of Document - pdf; pages: 14
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    References listed on IDEAS

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    1. Luis Catão & Sandeep Kapur, 2004. "Missing Link; Volatility and the Debt Intolerance Paradox," IMF Working Papers 04/51, International Monetary Fund.
    2. Reisen, Helmut & Von Maltzan, Julia & Larraín, Guillermo, 1998. "Emerging market risk and sovereign credit ratings," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34380, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. 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.
    4. 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.
    5. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
    6. Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1383-1406, July.
    7. George Kopits, 2001. "Fiscal Rules; Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 01/145, International Monetary Fund.
    8. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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    Citations

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    Cited by:

    1. Iulia Andreea Bucur & Simona Elena Dragomirescu, 2013. "An Analysis Of The Fiscal Convergence Criteria In The European Union In Terms Of The Sustainability," Studies and Scientific Researches. Economics Edition, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, issue 18.
    2. Saibu Olufemi Muibi, 2015. "Determining Optimal Crude Oil Price Benchmark in Nigeria: An Empirical Approach," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 18(58), pages 51-80, December.
    3. Ilhan Eroglu, 2015. "Fi̇nanci̇al Di̇sci̇pli̇nary Efforts Free From Imf İn Turkey," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 0, pages 247-254, July.

    More about this item

    Keywords

    Debt dynamics; Monte-Carlo simulation; fiscal policy rules; debt sustainability;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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