Signaling Fiscal Regime Sustainability

38 Pages Posted: 11 Feb 2006

See all articles by Francesco Drudi

Francesco Drudi

European Central Bank (ECB)

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased

Multiple version iconThere are 2 versions of this paper

Date Written: July 1999

Abstract

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.

Keywords: signaling, fiscal stabilization, tax smoothing, debt sustainability, credit ratings

JEL Classification: E63, H6, F22

Suggested Citation

Drudi, Francesco and Prati, Alessandro, Signaling Fiscal Regime Sustainability (July 1999). IMF Working Paper No. 99/86. Available at SSRN: https://ssrn.com/abstract=880613

Francesco Drudi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased ( email )

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