The Cost of Future Policy: Intertemporal Public Sector Balance Sheets in the G7

Author/Editor:

Yugo Koshima ; Jason Harris ; Alexander F. Tieman ; Alessandro De Sanctis

Publication Date:

May 6, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper compiles the Intertemporal Public Sector Balance Sheets for all G7 countries and examines their relationship with government borrowing costs. In 2018, all G7 countries have negative Intertemporal Net Financial Worth (INFW), falling short of their intertemporal budget constraint. A decomposition of the evolution of INFW shows that short-term fluctuations are mainly driven by fiscal policy changes, while in the long run demographic changes and health and pension obligations play a larger role. We find that on average a 10 percentage point of GDP increase in INFW reduces the (future) 10-1 year sovereign yield curve spread by 2.8 basis points. This results suggest that financial markets pay attention to governments’ future policy obligations, in addition to its current assets and liabilities.

Series:

Working Paper No. 2021/128

Frequency:

regular

English

Publication Date:

May 6, 2021

ISBN/ISSN:

9781513573335/1018-5941

Stock No:

WPIEA2021128

Pages:

48

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