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Ghosh, Atish R.; Kim, Jun I.; Mendoza, Enrique G.; Ostry, Jonathan D.; Qureshi, Mahvash S.
The Economic journal (London), February 2013, Letnik: 123, Številka: 566Journal Article
How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic model of sovereign default in which risk-neutral investors lend to a government that displays 'fiscal fatigue', whereby its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled over. Using data for 23 advanced economies over the period 1970—2007, we find evidence of a fiscal reaction function with these features, and use it to compute 'fiscal space', defined as the difference between current debt ratios and the estimated debt limits.
