Reassessing the fiscal mix for successful debt reduction

A historical public debt database

Emanuele Baldacci, Sanjeev Gupta and Carlos Mulas-Granados

Economic Policy, 2012, vol. 27, issue 71, 365-406

Abstract: This paper assesses the determinants of the duration of debt reduction episodes in a large sample of countries over the last three decades using a survival model. Results show that increases in the primary balances are the main source of debt reduction. Expenditure-based fiscal adjustments are key for reducing the length of debt consolidation spells, including in the aftermath of financial crises. Political fragmentation and the proximity of elections make debt sustainability more difficult to achieve, while structural reforms that help spur growth decrease the duration of debt reduction. In contrast to previous findings, however, we show that when adjustment needs are large – as in many advanced economies today – fiscal consolidations that rely also on revenue-enhancing measures are more likely to accelerate debt reduction. We label it as the ‘Rebalancing Adjustment Effect’. This result is particularly strong when countries experience a financial crisis.— Emanuele Baldacci, Sanjeev Gupta and Carlos Mulas-Granados

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:27:y:2012:i:71:p:365-406.

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