IMF Working Papers

Signaling Fiscal Regime Sustainability

By Alessandro Prati, Francesco Drudi

July 1, 1999

Download PDF

Preview Citation

Format: Chicago

Alessandro Prati, and Francesco Drudi. Signaling Fiscal Regime Sustainability, (USA: International Monetary Fund, 1999) accessed November 23, 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:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1999/086

  • Stock No:

    WPIEA0861999

  • ISBN:

    9781451850864

  • ISSN:

    1018-5941

You May Also Be Interested In...

Sierra Leone: 2024 Article IV Consultation and Request for a 38-Month Arrangement Under the Extended Credit Facility-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Sierra Leone

November 22, 2024

Implementing Risk-Based Solvency for Insurers—Lessons from Kenya, Mexico, and South Africa

November 22, 2024

Bilateral Trade in Services and Exchange Rates: Evidence of Dominant Currency Pricing

November 22, 2024

The Role of Corporate Cash Holdings in the Transmission of Monetary Policy Tightening

November 22, 2024