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This paper was presented at a Bank of Italy Workshop on Fiscal Sustainability held in Perugia, January 20–22, 2000 and it is to be published by the Bank of Italy. The authors are grateful to workshop discussants and participants, and to Steven Barnett, Richardus Harmsen, Michael Keen, and Atsushi Masuda, for comments.
A good example is provided by Buiter and Patel (1992), who use the Buiter indicator to examine fiscal sustainability in India.
In a certain world, discounting by the marginal rate of substitution or by the risk-free interest rate would be equivalent.
The IMF’s Code of Good Practices on Fiscal Transparency requires that the annual budget should be presented in a medium-term framework that emphasizes fiscal sustainability, while Hemming and Petrie (2000) suggest that unsustainable debt dynamics are a major source of fiscal vulnerability.
Quite often, a scenario with policies that are weaker than those currently in place is prepared to illustrate the costs of relaxing the fiscal policy stance. In the context of assessing fiscal vulnerability, Hemming and Petrie (2000) also propose stress-testing of the baseline fiscal scenario by examining the impact of extremely adverse developments on fiscal outcomes.
Under usual circumstances in countries with a debt problem, fiscal adjustment is expected to have beneficial effects on both growth and interest rates via confidence effects, lower country risk premia etc. However, excessively harsh adjustment could have the opposite effect, which might justify a different target (normally specified as reaching the original debt target at a later date).
Market value is also difficult to assess because the government is a large player in debt markets. If it were to start repaying its outstanding liabilities, it would almost certainly raise the market value of the remaining stock.
Typically, a stock of debt operation on Naples terms is assumed. See Andrews and others (1999) for further details.
The NPV of external debt is used in order to best capture the concessionality of the debt structure.
The criterion on revenues is included to prevent the moral hazard problem of having a country actually reducing its fiscal revenues (and increasing its debt-revenue ratio) in order to receive debt relief.