Public Debt Targeting An Application to the Caribbean

August 1, 2011

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Alejandro D Guerson, and Giovanni Melina. Public Debt Targeting An Application to the Caribbean, (USA: International Monetary Fund, 2011) accessed December 22, 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 fiscal policy framework we call Public Debt Targeting. The framework seeks to smooth primary spending over the business cycle while remaining consistent with public debt sustainability. Under the proposed framework, a government announces a commitment to a public debt band trajectory over the medium term, while sequentially announcing primary expenditures for the next budget cycle, which are determined recursively based on the history of shocks. Public debt targeting differs from a structural balance rule in that it internalizes the effect of the deterioration in creditworthiness from fiscal deficits and public debt accumulation, which tend to affect sovereign spreads, interest rates, exchange rates, and economic activity. The proposed framework is applied to Caribbean economies, which in general show high levels of public debt and procyclical primary expenditure.

Subject: Budget planning and preparation, Expenditure, Fiscal policy, Fiscal stance, Public debt, Public financial management (PFM)

Keywords: Aggregate demand, Budget planning and preparation, Caribbean, Country authorities, Expenditure consolidation, Expenditure envelope, Expenditure growth, Expenditure impulse, Expenditure simulation, Expenditure stance, Expenditure vis-à-vis GDP, Fiscal rules, Fiscal stance, Interest expenditure, Political economy, Potential GDP, Primary expenditure, Pro-cyclical bias, Procyclical spending, Public debt sustainability, Real GDP, Vis-à-vis GDP, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/203
Stock No:

WPIEA2011203
ISBN:

9781463902148
ISSN:

1018-5941

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