Measuring Fiscal Vulnerability and Fiscal Stress: A Proposed Set of Indicators

Baldacci, Emanuele; McHugh, James; Petrova, Iva

doi:10.2139/ssrn.1826547

Cited by 11 publications

(6 citation statements)

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“…According to Baldacci et al . (2011), an efficient monetary framework must give an acceptable and satisfactory warning mechanism for fiscal vulnerability and should analyze the probability of rollover and refinancing issues for developing countries.…”

Section: Methodsmentioning

confidence: 99%

“…The metrics involved in Equation (2) represent the three key characteristics: first, the level of burden on the fiscal position of the economy; second, the long-term demographic trends which pose a burden on the economic situation of the country (based on the fertility rate in the country and the funding requirements for the problems related to social security challenges); and third, the country’s financing requirements. Based on the work of Baldacci et al . (2011) and the data availability for the economy of Pakistan, the indices of the current study consist of five variables.…”

Section: Methodsmentioning

confidence: 99%

“…The proposal of a fiscal monitoring framework for the assessment of rollover risks, which are associated with developing economies, is the part of work conducted by Baldacci et al . (2011).…”

Section: Literature Reviewmentioning

confidence: 99%

“…The concerns of rollover and refinancing of public debt emerge when the policies of the government become unsustainable. It means a perception of widespread expectation that government and fiscal authorities would have to face short- or medium-term complications in maintaining the creditworthiness of an economy (Baldacci, McHugh, & Petrova, 2011).…”

Section: Introductionmentioning

confidence: 99%

“…The fiscal variables must give early warning signals about rollover and refinancing problems, that is how it provides an opportunity to adapt governmental policies ahead of fiscal vulnerabilities which would ultimately result in fiscal stress events. The fiscal vulnerability could be mitigated through a tight fiscal policy, which includes steps like an increase in tax rates or a decrease in government expenditure (Baldacci et al ., 2011). The phase, occurrence or an event of financial stress is defined in literature as a situation, where the financial system of the country is under pressure and its primary characteristic of financial intermediation becomes weak.…”

Section: Introductionmentioning

confidence: 99%

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An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study

Chandia

Iqbal

Bahadur

2022

FREP

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PurposeThis study aims to analyze the imbalances in the public finance structure of Pakistan’s economy and highlight the need for comprehensive reforms. Specifically, it aims to contribute to the empirical literature by analyzing the relationship between fiscal vulnerability, financial stress and macroeconomic policies in Pakistan’s economy between 1971 and 2020.Design/methodology/approachThe study develops an index of fiscal vulnerability, an index of financial stress and an index of macroeconomic policies. The fiscal vulnerability index is based on the patterns of fiscal indicators resulting from past trends of the selected variables in Pakistan’s economy. The financial stress in Pakistan is caused from the financial disorders that are acknowledged in the composite index, which is based on variables with the potential to indicate periods of stress stemming from the foreign exchange market, the securities market and the monetary policy components. The macroeconomic policies index is developed to analyze the mechanism through which fiscal vulnerability and financial stress have influenced macroeconomic policies in Pakistan. The causal association between fiscal vulnerability, financial stress and macroeconomic policies is analyzed using the auto-regressive distributive lags approach.FindingsThere exists a long-run relationship between the three indices, and a bi-directional causality between fiscal vulnerability and macroeconomic policies.Originality/valueThis study contributes to the development of a fiscal monitoring mechanism, which has the basic purpose of analyzing the refinancing risk of public liabilities. Moreover, it focuses on fiscal vulnerability from a macroeconomic perspective. The study tries to develop a framework to assess fiscal vulnerability in light of “The Risk Octagon” theory, which focuses on three risk components: fiscal variables, macroeconomic-disruption-associated shocks and non-fiscal country-specific variables. The initial contribution of this work to the literature is to develop a framework (a fiscal vulnerability index, financial stress index and macroeconomic policies index) for effective and result-oriented macro-fiscal surveillance. Moreover, empirical literature emphasized and advised developing countries to develop their own capacity mechanisms to assess their fiscal vulnerability in light of the IMF guidelines regarding vulnerability assessments. This study thus attempts to fulfill the said gap identified in literature.

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Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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