Fiscal rules for debt sustainability in emerging markets: the impact of volatility and default risk

Adrian Penalver and Gregory Thwaites

Bank of England working papers from Bank of England

Abstract: The determinants of public debt dynamics – real interest rates, the real exchange rate, output growth and the primary fiscal balance – are typically more volatile in emerging market economies than in industrialised countries. Capital markets also typically demand higher interest rates from emerging markets when their debt dynamics deteriorate. This paper considers how these characteristics affect the choice of fiscal policy rules in emerging markets. We estimate an econometric model of the determinants of public debt dynamics on Brazilian data and use this model to simulate the effect of different fiscal policy rules for future paths of debt. We then derive the set of fiscal policy rules which stabilise public debt dynamics. We find that macroeconomic forecast uncertainty and feedback among the endogenous variables (principally from the debt-GDP ratio to interest rates) force the policy rule to be significantly more responsive to changes in public debt. Rules that would stabilise debt in a fully known world may not do so when the policymaker is faced with a realistic pattern of shocks. The method we employ may be a useful addition to the toolkit of domestic and international policymakers when assessing fiscal rules and debt sustainability.

Date: 2006-09
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP307.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP307.pdf [301 Moved Permanently]--> https://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP307.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:307

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().