Fiscal Sustainability: A 21st Century Guide for the Perplexed
IMF Working Papers, April 22, 2013
Source details
- Canonical URL
- Fiscal Sustainability: A 21st Century Guide for the Perplexed
Other formats
Bibliographic details
- Authors: Evan C Tanner
- Published: April 22, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484381991.001
Overview and central argument
- The paper critically reviews recent work regarding the sustainability of public debt.
- It argues that Debt Sustainability Analyses (DSAs) should be more than mere mechanical simulation exercises.
- A DSA should be linked to an objective regarding the distribution of fiscal burdens and distortions over time, in the tradition of Barro’s 1979 tax smoothing objective.
- The paper discusses objective functions that yield simple and transparent fiscal policy rules.
Key findings and conceptual contributions
- DSAs that are purely mechanical risk missing normative considerations about intertemporal distribution of fiscal burdens and economic distortions.
- Linking DSAs to explicit objective functions (e.g., tax smoothing objectives) can produce policy rules that are both simple and transparent.
- The discussion emphasizes the importance of objective functions for generating fiscal policy guidance that accounts for distributional and distortionary trade-offs over time.
Policy implications and recommendations
- Design DSAs to incorporate an explicit objective function tied to distribution of fiscal burdens and distortions, rather than relying solely on mechanical simulations.
- Use objective-function–based approaches to derive fiscal policy rules that enhance transparency and offer clear guidance for fiscal consolidation and debt management.
- Prioritize clarity in fiscal targets (for example, surplus goals or surplus processes) and the rationale behind them to improve the interpretability and policy relevance of DSAs.
Technical themes and terminology highlighted
- Debt Sustainability Analysis (DSA)
- Tax smoothing (Barro 1979 tradition)
- Objective functions for fiscal policy
- Fiscal policy rules
- Related technical terms appearing in the source: debt ratio, debt stabilization, fiscal consolidation, fiscal rule, GDP ratio, Intertemporal solvency, market value, nominal interest rate, present value, primary surplus, public goods, stochastic simulation, structural surplus, surplus goal, surplus process, surplus ratio, surplus ratio-to-output, surplus target, war chest