Public Debt Targeting An Application to the Caribbean

Alejandro Guerson and Giovanni Melina

No 2011/203, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; primary expenditure; country authorities; expenditure simulation; aggregate demand; political economy; real GDP; Procyclical spending; public debt sustainability; fiscal rules; expenditure consolidation; expenditure impulse; potential GDP; expenditure envelope; expenditure vis-à-vis GDP; vis-à-vis GDP; pro-cyclical bias; interest expenditure; expenditure growth; expenditure stance; Fiscal stance; Budget planning and preparation; Caribbean (search for similar items in EconPapers)
Pages: 38
Date: 2011-08-01
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