Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies. (26th February 2013)

• Record Type: Journal Article
• Authors: Ghosh, Atish R.; Kim, Jun I.; Mendoza, Enrique G.; Ostry, Jonathan D.; Qureshi, Mahvash S.
• Is Part Of: Economic journal. Volume 123:Number 566(2013)
• Page Start: F4
• Page End: F30
• Publication Date: 2013-02-26
• Subjects: Economics -- Periodicals; Économie politique -- Périodiques; 330.05
• DOI: 10.1111/ecoj.12010
• Languages: English
• ISSNs: 0013-0133

Abstract

<abstract abstract-type="main" xml:lang="en" id="ecoj12010-abs-0001"> <title> <x xml:space="preserve">Abstract</x> </title> <p>How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic model of sovereign default in which risk‐neutral investors lend to a government that displays 'fiscal fatigue', whereby its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled over. Using data for 23 advanced economies over the period 1970–2007, we find evidence of a fiscal reaction function with these features, and use it to compute 'fiscal space', defined as the difference between current debt ratios and the estimated debt limits.</p> </abstract>