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Mr. Jonathan David Ostry, Mr. Atish R. Ghosh, and Mr. Raphael A Espinoza
What considerations should guide public debt policy going forward? Should debt be reduced to achieve normative anchors (such as 60 percent of GDP), should it be increased further to finance a big public investment push, or should the existing debt be serviced forever? We argue that, for countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortive taxes merely to bring the debt down is a treatment cure that is worse than the disease. High public debt of course is costly, but it is a sunk cost only made worse by efforts to pay down the debt through distortionary taxation. Living with the debt is the welfare-maximizing policy. In decisions vis-à-vis the big push for public investment, golden-rule considerations remain salient, with due account taken of the additional servicing costs (and associated distortive taxation) from the resulting buildup of public debt.
S. M. Ali Abbas, Mr. Bernardin Akitoby, Mr. Jochen R. Andritzky, Mr. Helge Berger, Mr. Takuji Komatsuzaki, and Justin Tyson
task has become particularly challenging in European advanced economies where expectations of low growth and limits to monetary policy support are shifting the burden of adjustment onto fiscal consolidation. The SDN will investigate the main drivers behind successful past debt reversals, focusing on macroeconomic and financial market conditions, the speed and form of fiscal adjustment, and the institutional policy setting, among other things. Its policy conclusions will depend on the emerging stylized facts but are likely to include considerations on the design and pace of fiscal consolidation, taking into account country-specific as well as regional economic, institutional, and political factors.
Oya Celasun, Mr. Francesco Grigoli, Ms. Keiko Honjo, Mr. Javier Kapsoli, Mr. Alexander D Klemm, Mr. Bogdan Lissovolik, Jan Luksic, Ms. Marialuz Moreno Badia, Ms. Joana Pereira, Mr. Marcos Poplawski Ribeiro, Baoping Shang, and Ms. Yulia Ustyugova
Latin America’s bold fiscal policy reaction to the global financial crisis was hailed as a sign that the region had finally overcome its procyclical fiscal past. However, most countries of the region have not yet rebuilt their fiscal space, despite buoyant commodity revenues and relatively strong growth in the aftermath of the crisis. Using the experience of Brazil, Chile, Colombia, Mexico, Peru, and Uruguay, this paper examines the lessons and legacies of the crisis by addressing the following questions, among others: How much did the 2009 fiscal stimulus help growth? What shortcomings were revealed in the fiscal policy frameworks? What institutional reforms are now needed to provide enduring anchors for fiscal policy? How much rebuilding of buffers is needed going forward?
Vitor Gaspar, Mr. Maurice Obstfeld, Ms. Ratna Sahay, Mr. Douglas Laxton, Mr. Dennis P Botman, Kevin Clinton, Mr. Romain A Duval, Kotaro Ishi, Zoltan Jakab, Laura Jaramillo, Mr. Constant A Lonkeng Ngouana, Mr. Tommaso Mancini Griffoli, Mr. Joannes Mongardini, Susanna Mursula, Erlend Nier, Ms. Yulia Ustyugova, Hou Wang, and Mr. Oliver Wuensch
The recovery in GDP growth since the global financial crisis has been halting and weak. Concern is widespread that countercyclical policies have run out of space or lack the power to raise growth or deal with the next negative shock. This note argues that room exists for effective policies and that it should be used if appropriate. The most promising route involves a comprehensive, consistent, and coordinated approach to policy making. Comprehensive policy actions within a country exploit synergies, making the whole greater than the sum of parts. Consistent policy frameworks anchor long-term expectations while allowing decisive short- to medium-term accommodation whenever necessary. Coordinated policies across major economies amplify the helpful effects of individual policy actions through positive cross-border spillovers. The findings of this paper indicate that policy coordination adds particular value if the current approach falls short of reviving growth, or in the event of a further downward shock.
Mr. Kenneth H Kang, Mr. Michael Keen, Mahmood Pradhan, and Ruud A. de Mooij
Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
Oya Celasun, Mr. Francesco Grigoli, Ms. Keiko Honjo, Mr. Javier Kapsoli, Mr. Alexander D Klemm, Mr. Bogdan Lissovolik, Jan Luksic, Ms. Marialuz Moreno Badia, Ms. Joana Pereira, Mr. Marcos Poplawski Ribeiro, Baoping Shang, and Ms. Yulia Ustyugova
La reacción audaz que tuvo la política fiscal de América Latina ante la crisis financiera mundial fue tomada como una señal de que la región finalmente había superado su pasado fiscal pro-cíclico. Sin embargo, la mayoría de los países de la región aún no han reconstruido su espacio fiscal, a pesar de los abundantes ingresos públicos provenientes de las materias primas y el crecimiento relativamente estable tras la crisis. A partir de la experiencia de Brasil, Chile, Colombia, México, Perú y Uruguay, este documento analiza las lecciones y legados de la crisis abordando las siguientes preguntas, entre otras: ¿Cuánto contribuyó el estímulo fiscal de 2009 al crecimiento? ¿Qué deficiencias se identificaron en los marcos de política fiscal? ¿Qué reformas institucionales se necesitan ahora para aportar anclas persistentes para la política fiscal? ¿En qué medida se necesita reconstruir las protecciones de cara al futuro?
Michal Andrle, Mr. John C Bluedorn, Luc Eyraud, Mr. Tidiane Kinda, Ms. Petya Koeva Brooks, Mr. Gerd Schwartz, and Anke Weber
Successive reforms have brought many positive elements to the European Union’s fiscal framework. But they have also increased its complexity. The current system involves an intricate set of fiscal constraints, which hampers effective monitoring and public communication. Compliance has also been weak. This note discusses medium-term reform options to simplify the framework and improve compliance. Based on model simulations and practical considerations, it argues for moving to a two-pillar approach, with a single fiscal anchor (public debt-to-GDP) and a single operational target (an expenditure growth rule, possibly with an explicit debt correction mechanism) linked to the anchor.