Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts

May 1, 2011

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Format: Chicago

Kei Kawakami, and Rafael Romeu. Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts, (USA: International Monetary Fund, 2011) 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

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.

Subject: Financial services, Fiscal policy, Fiscal stance, Output gap, Production, Production growth, Real interest rates

Keywords: Baseline debt, Brazil, Debt projection, Debt reduction effects, Debt sustainability, Debt sustainability fan, Fiscal policy feedback, Fiscal stance, Forecasted debt decline, Forecasting, Forecasting framework, Global, IMF, Interest rate, Mn mathvariant, Motion equation, Output gap, Production growth, Reaction function, Real GDP, Real interest rates, Simulation model, Stochastic debt forecasting framework, Transmission identification, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/107
Stock No:

WPIEA2011107
ISBN:

9781455261369
ISSN:

1018-5941

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