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On Fixed and Variable Fiscal Surplus Rules
Author:
International Monetary Fund
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Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 117
Language:
English
Publication Date:
01 Jul 2004
DOI:
https://doi.org/10.5089/9781451854046.001
ISBN:
9781451854046
ISSN:
1018-5941
Pages:
14
Keywords:
WP; real interest rate; Debt dynamics; Monte-Carlo simulation; fiscal policy rules; debt sustainability; surplus rule; sustainability concern; debt level; public sector debt dynamics; debt stock; rule to an alternative; Fiscal rules; Real interest rates; Debt sustainability analysis; Africa
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Fiscal rules are being increasingly used by both emerging and developed economies. This paper analyzes two alternative fiscal policy rules in terms of their impact on debt sustainability: a rule that fixes the ratio of primary surplus to GDP ("fixed surplus rule") and one that sets the primary surplus as a linear function of debt to GDP ratio ("variable surplus rule"). A simple debt dynamics equation, incorporating real shocks, is constructed, and the probability of exceeding the critical debt level is simulated using Monte Carlo techniques. The results show that the variable surplus rule performs better than the simple fixed surplus rule, by reducing debt sustainability concerns and the necessary medium-term primary surplus. This result hinges on the government's ability to make a credible commitment to the variable surplus rule in the medium run.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2004: Issue 117