Fiscal Sustainability and Fiscal Risk: An Analytical Framework
Fiscal Sustainability and Fiscal Risk: An Analytical Framework
This chapter introduces a framework of rollover risk that takes into account three dimensions: the baseline projections of fiscal variables (stock and flow variables, asset and liability structure, and long-term age-related fiscal spending), fiscal risks surrounding the baseline scenario (macroeconomic and fiscal policy shocks), and other salient variables (nonfiscal variables and risk appetite). It then uses this framework to examine the factors that affect markets' perceptions of the risk of a fiscal crisis, or of rollover problems. The chapter first reviews some basic concepts and the key challenges that economies are facing following the deterioration of the fiscal accounts in 2008 to 2009 before presenting the conceptual framework used to discuss rollover risks, breaking down the analysis into factors affecting the baseline fiscal projections, the risks around those projections, and other relevant factors affecting the perception of rollover risks. It also considers how the likelihood of a rollover crisis is determined by the composition of assets and liabilities in terms of maturity, currency denomination, and characteristics of the investor base.
Keywords: rollover risks, fiscal variables, fiscal risks, fiscal policy, nonfiscal variables, risk appetite, fiscal crisis, baseline fiscal projections, currency denomination
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