Debt Dynamics and Fiscal Sustainability
Debt Dynamics and Fiscal Sustainability
This chapter explores the relationship between government debt dynamics and the sustainability of fiscal policies by focusing on gap measures based on the difference between the actual value of a fiscal magnitude, such as the primary balance, and the notional value that would meet specific criteria, such as hitting a target debt ratio in a specified time or satisfying the intertemporal budget constraint (IBC) of the government; estimates of fiscal policy reaction functions (FPRF) that allow testing the consistency of these FPRFs with the IBC condition or the absence of Ponzi-game explosive debt dynamics; and fiscal vulnerability indicators that can flag the likelihood of a future fiscal crisis or stress episode when prespecified threshold values are crossed (typically based on the past predictive power of the indicators). The chapter also presents extensions of basic debt dynamics methodology for the treatment of government assets and the dynamics of net debt, as well as the methodological adjustments necessary to deal with foreign currency-denominated and inflation-indexed debt.
Keywords: government debt, intertemporal budget constraint, fiscal policy, fiscal policy reaction functions, debt dynamics, fiscal vulnerability, fiscal crisis, government assets, foreign currency, inflation
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