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Fiscal limits in developing countries: A DSGE Approach

Huixin Bi (), Wenyi Shen () and Shu-Chun Yang ()

Journal of Macroeconomics, 2016, vol. 49, issue C, 119-130

Abstract: This paper studies fiscal limits in developing countries using a dynamic stochastic general equilibrium (DSGE) approach. Distributions of fiscal limits, which measure a government’s capacity to service its debt, are simulated based on macroeconomic uncertainty and fiscal policy. The analysis shows that expected future revenue plays an important role in explaining the low fiscal limits of developing countries, relative to those of developed countries. Large devaluation of real exchange rates can significantly reduce a government’s capacity to service its debt and lower the fiscal limits. Temporary disturbances, therefore, can shift the distribution of fiscal limits and suddenly change perceptions about fiscal sustainability.

Keywords: Fiscal limits; External debt; Developing countries; DSGE models (search for similar items in EconPapers)
JEL-codes: E62 H30 H60 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jmacro.2016.06.002

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