Policy Space Index: Short-Term Response to a Catastrophic Event

IMF Working Papers, June 17, 2022

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Proposes a policy space index to quantify the short-term policy space available to a country in response to a catastrophic event.
Index expresses overall policy space directly in percent of GDP.
Applied illustratively to the Covid-19 crisis.

Composite index combining three nominal policy space indicators:
- Fiscal space (a quantitative, albeit relatively limited and narrow, concept).
- Nominal monetary space.
- Reserve space.
Each nominal policy space indicator is adjusted for five institutional features:
- Status of the country’s currency.
- Income group.
- Access to capital markets.
- Debt distress level.
- Exchange rate regime.
Final policy space index is the composite of the three adjusted nominal policy space indicators.
Noted distinction: the index is different from the approach to measure fiscal space at the IMF and requires more work before it can be used operationally.

Applied the proposed index to the Covid-19 crisis as a demonstration of the index’s use.

Subjects: Central bank policy rate, Debt sustainability, Exchange rate arrangements, External debt, Financial services, Fiscal policy, Fiscal space, Foreign exchange, Money, Reserve currencies
Keywords: Central bank policy rate, Debt sustainability, Exchange rate arrangements, Fiscal space, foreign reserves, Global, market access, policy space, policy space decision trees, public debt, Reserve currencies, space calculation, space decision trees, space index, space indicator, space matrix