The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Cristiano Cantore, Paul Levine, Giovanni Melina, and Joseph Pearlman
INTERNATIONAL MONETARY FUND
The initial government debt-to-GDP ratio and the government's commitment play a pivotal role in determining
the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for
low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is
optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless
these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is
reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy,
designed for an environment with 'normal shocks', perform reasonably well in mimicking the Ramsey-optimal
response to one-off government debt shocks. When the government can issue also long-term bonds-under
commitment-the optimal debt consolidation pace is slower than in the case of short-term bonds only, and
entails an increase in the ratio between long and short-term bonds.