On Fixed and Variable Fiscal Surplus Rules

July 1, 2004

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On Fixed and Variable Fiscal Surplus Rules, (USA: International Monetary Fund, 2004) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Debt sustainability, Debt sustainability analysis, External debt, Financial services, Fiscal policy, Fiscal rules, Public debt, Real interest rates

Keywords: Africa, Debt dynamics, Debt level, Debt stock, Debt sustainability, Debt sustainability analysis, Fiscal policy rules, Fiscal rules, Monte-Carlo simulation, Public sector debt dynamics, Real interest rate, Real interest rates, Rule to an alternative, Surplus rule, Sustainability concern, WP

Publication Details

Pages:

14
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/117
Stock No:

WPIEA1172004
ISBN:

9781451854046
ISSN:

1018-5941

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