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Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

Atish Ghosh (), Jun I. Kim, Enrique Mendoza (), Jonathan Ostry () and Mahvash Qureshi

No 16782, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic ability-to-pay model of sovereign default in which risk-neutral investors lend to a government that displays "fiscal fatigue," because its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled-over. Using data for 23 advanced economies over 1970-2007, we find evidence of a fiscal reaction function with these features, and use it to compute "fiscal space," defined as the difference between projected debt ratios and debt limits.

JEL-codes: E62 H62 H63 (search for similar items in EconPapers)
Date: 2011-02
Note: IFM
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Published as Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages F4-F30, 02.

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