Fiscal Limits, External Debt, and Fiscal Policy in Developing Countries

What are the Fiscal Limits for the Developing Economies of Central America and the Caribbean?

“…The closed economy model used by Bi (2011) for developed economies in Europe and the Oceanic area (Australia, New Zealand and the archipelago of Indonesia) showed a likely framework to discuss fiscal measures in the short run and policy reform in the long run. Bi et al (2013) extended this work, determining the state-dependent fiscal limits of two Latin American economies. The authors' findings suggest that expected future income was critical in deriving lower fiscal bounds or limits for developing countries versus developed economies.…”

“…The fiscal limit is usually the highest level of debt that the government can service. It is dependent on the current state of the macroeconomic fundamentals, the present value of fiscal surpluses, the state of government transfers and subsidies, and the impact of sovereign risk on the economy (Bi 2011;Bi et al, 2013). The simulations of the limits are demonstrated in endogenously derived dynamic Laffer curves.…”

“…The fiscal limit, which is state-dependent on existing macroeconomic fundamentals and stochastic in nature as random disturbances affect the future path of fiscal surpluses, is effectively defined at each period and depends on macroeconomic circumstances and fiscal policy (Bi et al, 2013;Juessen et al, 2011;Leeper, 1991).…”

“…Furthermore, random exogenous shocks to economies can negatively impact the future path of fiscal surpluses, making it increasing difficult for governments to service their debt and maintain their current sovereign credit rating. (Bi, 2011;Bi et al, 2013;Leeper, 1991).…”

“…They continue to be impacted, sometimes negatively, by the state of world trade and the economies of their leading trade partners. An understanding of fiscal limits within these economies is vital, as policymakers and central bankers are continually searching for methodologies and tools that can help them better define these limits, provide more robust forecasts of the ability of their economies to raise debt, and develop the fiscal policies necessary for containing debt and default risk in the short and long term (Bi 2011;Bi et al, 2013).…”