Signaling Fiscal Regime Sustainability

Alessandro Prati and Francesco Drudi

No 1999/086, IMF Working Papers from International Monetary Fund

Abstract: This paper proposes a signaling model that offers a new perspective on why governments deviate from optimal tax smoothing and delay debt stabilization. In our model, dependable—but not fully credible—governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock of debt has been accumulated). At this point, they may deviate from tax smoothing not to be mimicked by weak governments. The model predicts that primary balances and debt stocks are complementary inputs in the credit rating function as tests on Italian, Irish, Belgian, and Danish data show.

Keywords: WP; debt stock; monetary policy; mover accent; signaling; fiscal stabilization; tax smoothing; debt sustainability; credit ratings; debt financing cost; debt level; debt maturing; rating function; debt accumulation; stock of debt; Fiscal stance; Stocks; Global; equilibrium existence; signaling model; Balance-to-GDP ratio; pooling equilibrium (search for similar items in EconPapers)
Pages: 38
Date: 1999-07-01
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Signaling fiscal regime sustainability (2000)
Working Paper: Signaling Fiscal Regime Sustainability (1998)
Working Paper: Signaling Fiscal Regime Sustainability (1998)
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