Signaling Fiscal Regime Sustainability

July 1, 1999

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Alessandro Prati, and Francesco Drudi. Signaling Fiscal Regime Sustainability, (USA: International Monetary Fund, 1999) 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

This paper proposes a signaling model that offers a new perspective on why governments deviate from optimal tax smoothing and delay debt stabilization. In our model, dependable—but not fully credible—governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock of debt has been accumulated). At this point, they may deviate from tax smoothing not to be mimicked by weak governments. The model predicts that primary balances and debt stocks are complementary inputs in the credit rating function as tests on Italian, Irish, Belgian, and Danish data show.

Subject: Credit ratings, Expenditure, Financial institutions, Fiscal policy, Fiscal stance, Money, Public debt, Stocks

Keywords: Balance-to-GDP ratio, Credit ratings, Debt accumulation, Debt financing cost, Debt level, Debt maturing, Debt stock, Debt sustainability, Equilibrium existence, Fiscal stabilization, Fiscal stance, Global, Monetary policy, Mover accent, Pooling equilibrium, Rating function, Signaling, Signaling model, Stock of debt, Stocks, Tax smoothing, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/086
Stock No:

WPIEA0861999
ISBN:

9781451850864
ISSN:

1018-5941

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