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Title:Fiscal fragility: what the past may say about the future PDF Logo
Authors:Aizenman, Joshua
Pasricha, Gurnain Kaur
Issue Date:2010
Series/Report no.:Working Papers, Santa Cruz Institute for International Economics 10-21
Abstract:The end of the great moderation has profound implications on the assessment of fiscal sustainability. The pertinent issue goes beyond the increase in stock of public debt/GDP induced by the global recession, to include the perspective that the sustainability of a given public debt/GDP depends on the future volatility of the difference between real interest rates and GDP growth rate. For a given future projected public debt/GDP, we evaluate the possible distribution of the fiscal burden of debt for each OECD country, based on the historical realizations of the real interest rate and GDP growth differential. Fiscal projections may be alarmist if one jumps from the prior of low fiscal burdens that prevailed during great moderation to the prior of permanent high future burden. Yet, the importance of both real interest rate and the GDP growth rate in determining the actual debt burdens as well as the range of scenarios faced by OECD countries in the past suggests that countries exposed to heightened vulnerability may consider both short term stabilization (i.e., fiscal stimulus to support the recovery) and forward looking fiscal reforms (i.e. fiscal tightening to stabilize the debt dynamics).
Subjects:flow burden of public debt
fiscal vulnerability
JEL:E62
E63
E66
Document Type:Working Paper
Appears in Collections:Working Papers, Santa Cruz Institute for International Economics, UC Santa Cruz

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