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Assessing public debt sustainability for Costa Rica using the fiscal reaction function

Valerie Lankester-Campos, Kerry Loaiza-Marín and Carlos Monge-Badilla
Authors registered in the RePEc Author Service: Kerry Loaiza Marín, Sr. ()

Latin American Journal of Central Banking (previously Monetaria), 2020, vol. 1, issue 1

Abstract: This paper assesses Costa Rica's public debt sustainability empirically using three complementary approaches: the calculation of the debt-stabilizing primary fiscal balance obtained from the government's intertemporal budget constraint, the estimation of the parameters of a fiscal policy reaction function (FRF) following the methodology originally proposed by proposed by Bohn (2007); and the estimation of fan charts for the primary fiscal balance and public debt expressed as shares of GDP following the approach proposed by Celasun et al. (2006). With annual data from the period 1974–2018, we find that debt has been unsustainable for specific long- and short-term episodes. For the most recent observations, the conclusion is that debt trajectory is unsustainable. Given that a major fiscal reform was approved at the end of 2018, an uncertainty evaluation of its impact on the primary balance's adjustment path until 2023 and 2030 is included using the official estimated reform projections. The results indicate that the maximum level of the debt ratio will be 68% in 2026, after which this upward trend reverses.

Keywords: Debt sustainability; Primary balance; Fiscal reaction function; Risk assessment; Fan chart (search for similar items in EconPapers)
JEL-codes: C15 C22 E62 H63 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.latcb.2020.100014

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Latin American Journal of Central Banking (previously Monetaria) is currently edited by Manuel Ramos-Francia

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