Public Debt Targeting An Application to the Caribbean

Author/Editor:

Alejandro D Guerson ; Giovanni Melina

Publication Date:

August 1, 2011

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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:

This paper proposes a fiscal policy framework we call Public Debt Targeting. The framework seeks to smooth primary spending over the business cycle while remaining consistent with public debt sustainability. Under the proposed framework, a government announces a commitment to a public debt band trajectory over the medium term, while sequentially announcing primary expenditures for the next budget cycle, which are determined recursively based on the history of shocks. Public debt targeting differs from a structural balance rule in that it internalizes the effect of the deterioration in creditworthiness from fiscal deficits and public debt accumulation, which tend to affect sovereign spreads, interest rates, exchange rates, and economic activity. The proposed framework is applied to Caribbean economies, which in general show high levels of public debt and procyclical primary expenditure.

Series:

Working Paper No. 11/203

Subject:

English

Publication Date:

August 1, 2011

ISBN/ISSN:

9781463902148/1018-5941

Stock No:

WPIEA2011203

Format:

Paper

Pages:

38

Please address any questions about this title to publications@imf.org