This paper studies fiscal limits in developing countries using a dynamic stochastic general equilibrium (DSGE) approach. Distributions of fiscal limits, which measure a government’s capacity to service its debt, are simulated based on macroeconomic uncertainty and fiscal policy. The analysis shows that expected future revenue plays an important role in explaining the low fiscal limits of developing countries, relative to those of developed countries. Large devaluation of real exchange rates can significantly reduce a government’s capacity to service its debt and lower the fiscal limits. Temporary disturbances, therefore, can shift the distribution of fiscal limits and suddenly change perceptions about fiscal sustainability.
This work is part of the ‘Macroeconomics in Low-income countries’ programme”
Huixin Bi, Wenyi Shen, Shu-Chun S. Yang, Fiscal limits in developing countries: A DSGE Approach, Journal of Macroeconomics, Volume 49, 2016, Pages 119-130,https://doi.org/10.1016/j.jmacro.2016.06.002.
Fiscal limits in developing countries: A DSGE Approach