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Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts
Author:
Mr. Kei Kawakaminull

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and
Rafael Romeunull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 107
Language:
English
Publication Date:
01 May 2011
DOI:
https://doi.org/10.5089/9781455261369.001
ISBN:
9781455261369
ISSN:
1018-5941
Pages:
35
Keywords:
WP; interest rate; real GDP; mn mathvariant; Debt sustainability; forecasting; Brazil; IMF; reaction function; fiscal policy feedback; motion equation; transmission identification; forecasting framework; debt projection; simulation model; debt sustainability fan; baseline debt; forecasted debt decline; debt reduction effects; stochastic debt forecasting framework; Fiscal stance; Real interest rates; Production growth; Output gap; Global
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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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A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2011: Issue 107