Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts

Author/Editor: Kei Kawakami ; Rafael Romeu
Publication Date: May 01, 2011
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
Series: Working Paper No. 11/107
Frequency: Annually
Subject(s): Debt sustainability | Economic forecasting | IMF | Public debt

Author's Keyword(s): Debt sustainability | forecasting | Brazil | IMF
Publication Date: May 01, 2011
ISBN/ISSN: 9781455261369/1018-5941 Format: Paper
Stock No: WPIEA2011107 Pages: 35
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