Signaling Fiscal Regime Sustainability
Electronic Access:
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Summary:
This paper proposes a signaling model that offers a new perspective on why governments deviate from optimal tax smoothing and delay debt stabilization. In our model, dependable—but not fully credible—governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock of debt has been accumulated). At this point, they may deviate from tax smoothing not to be mimicked by weak governments. The model predicts that primary balances and debt stocks are complementary inputs in the credit rating function as tests on Italian, Irish, Belgian, and Danish data show.
Series:
Working Paper No. 1999/086
Subject:
Credit ratings Expenditure Financial institutions Fiscal policy Fiscal stance Money Public debt Stocks
English
Publication Date:
July 1, 1999
ISBN/ISSN:
9781451850864/1018-5941
Stock No:
WPIEA0861999
Pages:
38
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