Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts
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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.
Series:
Working Paper No. 2011/107
Subject:
Financial services Fiscal policy Fiscal stance Output gap Production Production growth Real interest rates
Frequency:
Annually
English
Publication Date:
May 1, 2011
ISBN/ISSN:
9781455261369/1018-5941
Stock No:
WPIEA2011107
Pages:
35
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