Debt Affordability in Developed and Emerging Market Economies: The Role of Fiscal Rules

Valencia, Oscar; Gómez-González, José Eduardo; Sánchez, Gustavo

doi:10.18235/0004267

Cited by 2 publications

(4 citation statements)

References 18 publications

(19 reference statements)

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“…Many researchers (see Wyplosz, 2012;Fatás et al, 2019;Eyraud et al, 2018;Caselli & Reynaud, 2020;Valencia et al, 2022) have analysed fiscal rules that can be used to control debt and thereby provide greater fiscal discipline and reduce high levels of public debt. The appropriate type of fiscal rules that allow for the limitation of public debt, is of significant importance in situations of unfavourable shocks, such as financial crises, pandemics, natural disasters or wars (Obstfeld, 2013;Battaglini & Coate, 2016;Romer & Romer, 2018).…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

“…The appropriate type of fiscal rules that allow for the limitation of public debt, is of significant importance in situations of unfavourable shocks, such as financial crises, pandemics, natural disasters or wars (Obstfeld, 2013;Battaglini & Coate, 2016;Romer & Romer, 2018). Gómez-González et al (2022) provide evidence of the positive and significant impact of implementing fiscal rules on the accessibility of public debt in both developed and emerging countries.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

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Selected method for determining fiscal targeting rules: Results for Poland

Przybylska-Mazur

2024

IER

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The objective of the article is the presentation of a selected method for determining fiscal targeting rules. The proposed fiscal rules make it possible to achieve the intended goals. In this article, the main goal of fiscal policy was the minimisation of deviations of the general government debt-to-GDP ratio from the target value. In the proposed method for determining fiscal targeting rules, we also considered the minimalisation of deviation of the inflation rate and output gap from their target values. We present the results of the empirical analysis for Poland. Research Design & Methods:The main design was quantitative. We used the modelling method. We applied the dynamic optimisation method for determining fiscal targeting rules. The fiscal targeting rule was the solution of selected dynamic optimisation problems with an infinite time horizon and discounting. We used the minimisation problem of the intertemporal loss function. We performed empirical analysis for quarterly data from the first quarter of 2011 to the third quarter of 2022 for Poland. We used the Bellman equation and the envelope theorem. Findings: In this article, we determined the fiscal targeting rule. This rule, determined as a solution to the minimisation problem of the intertemporal loss function, allows for the calculation of optimal values of the general government debt-to-GDP ratio while also considering the minimisation of deviations of the inflation rate and the output gap from their target values. We could observe the same direction of the optimal values of the debt-to-GDP ratio in different considered cases, but there is a different shift along the axis of ordinates. We could observe that reducing debt during good economic times allows for achieving an acceptable level of the debt-to-GDP ratio during a crisis. Implications & Recommendations:To minimise the intertemporal loss function, a portion of the financial resources accumulated during non-exceptional periods should be utilised during crises and shock events. Considering other variables such as inflation and the output gap when deciding on the value of the debt-to-GDP ratio, we noted that the fiscal convergence criterion for debt was not always fulfilled. Contribution & Value Added:In this article, we present a method of determining fiscal rules not only considering the general government debt-to-GDP ratio, but also considering such variables as the inflation rate and the output gap, as well as other variables such as general government balance to GDP ratio and the monetary policy instrument -the interest rate. The novelty of the article is also the determination of the fiscal targeting rule as a solution to the minimisation problem of intertemporal loss function. Thus, they make it possible to determine the optimal general government debt-to-GDP ratio, considering also the minimisation of deviations from the inflation rate and the output gap from their target values. Article type:research article

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Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Selected method for determining fiscal targeting rules: Results for Poland

Przybylska-Mazur

2024

IER

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“…Better institutional arrangements that strengthen fiscal rules are associated with a lower probability of debt spike episodes in Latin America and the Caribbean (Valencia et al, forthcoming a). Fiscal rules with solid legal foundations, enforcement mechanisms, independent fiscal councils, flexibility, and well-defined escape clauses allow governments to adjust their fiscal balances while avoiding explosive debt trajectories (Andrian et al, 2022;Valencia, Gómez-González, and Sánchez 2022;Afonso and Jalles, 2020). In particular, better fiscal institutions (for example, well defined expenditure ceilings) are associated with a lower probability of debt spikes.…”

Section: Debt Spike Determinants: What Regressions Revealmentioning

confidence: 99%

“…Better fiscal institutions are essential. More robust macro-fiscal frameworks and high-quality fiscal rules can prevent debt surges, potential crises, and greater fiscal policy procyclicality (Gómez-González, Valencia, and Sánchez, 2022). Better fiscal institutions and transparency would also impact the evolution of the stock-flow adjustment.…”

Section: Learning From the Pastmentioning

confidence: 99%

Dealing with Debt: Less Risk for More Growth in Latin America and the Caribbean

Powell,

Valencia

2023

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Debt has risen around the world, and Latin America and the Caribbean is no exception. Total debt has grown to US$5.8 trillion, or 117 percent of GDP, for the region and as much as 140 percent of GDP for its five largest economies. Public debt soared to over 70 percent of GDP during the pandemic, and corporates issued substantial amounts to survive the crisis. While the spending that led to this debt helped the region weather the pandemic, it is now weighing down the economy. This book examines the rise in debt in Latin America and the Caribbean and offers recommendations to policymakers to ensure debt is used wisely, avoid the harmful impacts, manage high debt levels well, and bring down debt where it is too high. It is hoped that the analyses and policy suggestions in this volume contribute to successfully confronting the challenges, lowering risk, boosting growth, and improving living standards across the region and beyond.

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Debt Affordability in Developed and Emerging Market Economies: The Role of Fiscal Rules

Cited by 2 publications

References 18 publications

Selected method for determining fiscal targeting rules: Results for Poland

Selected method for determining fiscal targeting rules: Results for Poland

Dealing with Debt: Less Risk for More Growth in Latin America and the Caribbean

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