A Probabilistic Approach to Fiscal Space and Prudent Debt Level: Application to Low-Income Developing Countries

By Olumuyiwa S Adedeji, Calixte Ahokpossi, Claudio Battiati, Mai Farid

August 5, 2016

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Olumuyiwa S Adedeji, Calixte Ahokpossi, Claudio Battiati, and Mai Farid. A Probabilistic Approach to Fiscal Space and Prudent Debt Level: Application to Low-Income Developing Countries, (USA: International Monetary Fund, 2016) accessed November 12, 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

What constitutes fiscal space or a prudent level of debt to conduct countercyclical policy while ensuring debt sustainability? This paper addresses the question by exploring the relationship between debt dynamics, and the probabilistic distribution of the primary balance and the effective interest rate. This proposed approach is useful in situations where the lack of relevant data makes it difficult to estimate detailed fiscal reaction functions. Applying this approach to Low-Income Developing Countries (LIDCs) and based on various debt ceiling assumptions, we find that about 60 percent of these countries presently have fiscal policy space to address adverse shocks, subject to the availability of domestic and external financing. Countries with strong institutional capacity tend to have more fiscal space, and countries with weak institutional capacity, mostly countries in conflict and fragile states, tend to lack fiscal space.

Subject: Asset and liability management, Debt limits, Fiscal policy, Fiscal rules, Fiscal space, Fiscal stance, Public debt

Keywords: Debt dynamics, Debt level, Debt limits, Fiscal rules, Fiscal space, Fiscal stance, Low-income developing countries, WB debt threshold, WB DSF framework, WB DSF threshold, WB framework, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/163
Stock No:

WPIEA2016163
ISBN:

9781475523607
ISSN:

1018-5941

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