Public Debt Targeting an Application to the Caribbean

39 Pages Posted: 7 Sep 2011

See all articles by Giovanni Melina

Giovanni Melina

International Monetary Fund (IMF)

Alejandro Guerson

International Monetary Fund (IMF)

Date Written: August 2011

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: Business cycles, Caribbean, Debt sustainability, Fiscal policy, Government expenditures, Public debt

Suggested Citation

Melina, Giovanni and Guerson, Alejandro, Public Debt Targeting an Application to the Caribbean (August 2011). IMF Working Paper No. 11/203, Available at SSRN: https://ssrn.com/abstract=1923519

Giovanni Melina (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alejandro Guerson

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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