## A Probabilistic Approach to Fiscal Space and Prudent Debt Level: Application to Low-Income Developing Countries

_IMF Working Papers, August 5, 2016_

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## Bibliographic details
- Authors: Olumuyiwa S Adedeji, Calixte Ahokpossi, Claudio Battiati, Mai Farid
- Published: August 5, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475523607.001

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### Research question and methodology
- Addresses: "What constitutes fiscal space or a prudent level of debt to conduct countercyclical policy while ensuring debt sustainability?"
- Method: explores the relationship between debt dynamics and the probabilistic distribution of the primary balance and the effective interest rate.
- Use case: proposed approach is useful in situations where the lack of relevant data makes it difficult to estimate detailed fiscal reaction functions.
- Application: applied to Low-Income Developing Countries (LIDCs) and evaluated under various debt ceiling assumptions.

### Key findings
- About 60 percent of these countries presently have fiscal policy space to address adverse shocks, subject to the availability of domestic and external financing.
- Countries with strong institutional capacity tend to have more fiscal space.
- Countries with weak institutional capacity, mostly countries in conflict and fragile states, tend to lack fiscal space.

### Implications and interpretation
- The probabilistic approach links stochastic behavior of the primary balance and effective interest rates directly to debt dynamics, offering an alternative where detailed fiscal reaction functions cannot be estimated.
- Debt ceiling assumptions materially affect which LIDCs are judged to have fiscal space.
- Institutional capacity is a central determinant of available fiscal space in the LIDC sample.

### Publication and metadata
- Authors: Olumuyiwa S Adedeji, Calixte Ahokpossi, Claudio Battiati, Mai Farid
- Date: August 5, 2016
- Series: Working Paper No. 2016/163
- Issue: 163
- Volume: 2016
- Pages: 20
- DOI: https://doi.org/10.5089/9781475523607.001
- Stock No: WPIEA2016163
- ISBN: 9781475523607
- ISSN: 1018-5941
- Subject: Asset and liability management, Debt limits, Fiscal policy, Fiscal rules, Fiscal space, Fiscal stance, Public debt
- Keywords: debt dynamics, debt level, Debt limits, Fiscal rules, Fiscal space, Fiscal stance, low-income developing countries, WB debt threshold, WB DSF framework, WB DSF threshold, WB framework, WP

*IMF Working Paper — A Probabilistic Approach to Fiscal Space and Prudent Debt Level: Application to Low-Income Developing Countries*

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- **1. Fiscal Space**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/a-probabilistic-approach-to-fiscal-space-and-prudent-debt-level-application-to-low-income-44171_