A Framework for Assessing Fiscal Sustainability and External Viability, with An Application to India

Karen Parker and Steffen Kastner

No 1993/078, IMF Working Papers from International Monetary Fund

Abstract: This paper presents a simple macroeconomic simulation model which can be used to evaluate alternative fiscal strategies and their implications for external viability. It attempts to bridge the gap between the literature on fiscal sustainability and the demands of operational work. The framework, developed in a spreadsheet format, generates estimates of public spending compatible with identified targets for growth, inflation and domestic and foreign borrowing. The difference between the spending path consistent with these targets and that based on current policies is the fiscal adjustment required to meet the authorities’ macroeconomic objectives. Alternatively, the framework can be used to assess the implications for inflation, interest rates and public indebtendess of a given spending path. Finally, one can analyze the impact of financial reform on fiscal and external performance. The model is applied to India to illustrate the types of simulations that may be conducted.

Keywords: WP; current account; debt service; private sector; money demand; high-inflation scenario; balance of payments projection; inflation profile; high-inflation context; long-term debt; balance of payments viability; default premium; foreign currency; long-run inflation; interest spending; deficit target; balance of payments target; Public sector; Inflation; Real interest rates (search for similar items in EconPapers)
Pages: 44
Date: 1993-10-01
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Citations: View citations in EconPapers (8)

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