Year: 2011
Type: report
Abstract: How high can public debt rise without compromising fiscal solvency?We answer this question using a stochastic ability-to-pay model of sovereign default in which risk-neutral investors lend to a government that displays "fiscal fatigue," because 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 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 projected debt ratios and debt limits.
DOI: 10.3386/w16782
Authors: Atish Ghosh, Jun Kim, Enrique Mendoza, Jonathan Ostry, Mahvash Qureshi
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2891745367