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A Buffer-Stock Model for the Government
Balancing Stability and Sustainability

by Jean-Marc Fournier

Series:Working Paper No. 19/159
ISBN 9781498325066
Code: #WPIEA2019159

Publication year: 2019

Cdn: $27.00; US: $25.00
Paperback
Language: English
40 pages
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A fiscal reaction function to debt and the cycle is built on a buffer-stock model for the government. This model inspired by the buffer-stock model of the consumer (Deaton 1991; Carroll 1997) includes a debt limit instead of the Intertemporal Budget Constraint (IBC). The IBC is weak (Bohn, 2007), a debt limit is more realistic as it reflects the risk of losing market access. This risk increases the welfare cost of fiscal stimulus at high debt. As a result, the higher the debt, the less governments should smooth the cycle. A larger reaction of interest rates to debt and higher hysteresis magnify this interaction between the debt level and the appropriate reaction to shocks. With very persistent shocks, the appropriate reaction to negative shocks in highly indebted countries can even be procyclical.
A Buffer-Stock Model for the Government
Cdn: $27.00; US: $25.00
International Monetary Fund (IMF) BookID: 125576 Added: 2019.8.2