Working Paper: NBER ID: w16478
Authors: Joshua Aizenman; Gurnain Kaur Pasricha
Abstract: The end of the great moderation has profound implications on the assessment of fiscal sustainability. The pertinent issue goes beyond the obvious increase in the stock of public debt/GDP induced by the global recession, to include the neglected perspective that the vulnerabilities associated with a given public debt/GDP increase with the future volatility of key economic variables. We evaluate for a given future projected public debt/GDP, the possible distribution of the fiscal burden or the flow cost of funding debt for each OECD country, assuming that this in future decades resembles that in the past four decades. Fiscal projections may be alarmist if one jumps from the priors of great moderation to the prior of permanent high future burden. Prudent adjustment for countries exposed to heightened vulnerability may entail both short term stabilization and forward looking fiscal reforms.
Keywords: Fiscal sustainability; Public debt; OECD; Economic volatility
JEL Codes: E62; E66; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public debt-to-GDP ratio (D) (H69) | Future volatility of key economic variables (V) (G17) |
| Flow cost of public debt (rg) (H69) | Fiscal burden (B) (H69) |
| Real interest rate (r) relative to growth rate (g) (E43) | Fiscal burden (B) (H69) |
| Fiscal burden (B) (H69) | Fiscal sustainability (S) (H69) |