Restoring Debt Sustainability after Crises: Implications for the Fiscal Mix

36 Pages Posted: 1 Feb 2011

See all articles by Emanuele Baldacci

Emanuele Baldacci

International Monetary Fund (IMF) - Fiscal Affairs Department

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department

Carlos Mulas-Granados

Government of the Kingdom of Spain - Economic Bureau of the President

Date Written: October 2010

Abstract

This paper analyzes the experience of 99 advanced and developing economies in restoring fiscal sustainability during 1980 - 2008 after banking crises, which led to large accumulation of public debt. It finds that successful debt reductions have relied chiefly on generation of large primary surpluses in post-crisis years through current expenditure cuts. These savings have been accompanied by growth-promoting measures and a supportive monetary policy stance. While these results are consistent with the existing literature, the paper finds that revenue-raising measures increased the likelihood of successful consolidation in countries that faced large adjustment needs after the crisis. This reflects the fall in effectiveness of spending cuts when deficit reduction needs are large independent of initial tax ratios.

Keywords: Banking crisis, Debt consolidation, Debt reduction, Debt sustainability, Developed countries, Developing countries, Economic recovery, Financial crisis, Fiscal policy, Fiscal risk, Fiscal sustainability, Public debt, Revenue measures, Debt rescheduling

Suggested Citation

Baldacci, Emanuele and Gupta, Sanjeev and Mulas-Granados, Carlos, Restoring Debt Sustainability after Crises: Implications for the Fiscal Mix (October 2010). IMF Working Paper No. 10/232, Available at SSRN: https://ssrn.com/abstract=1750721

Emanuele Baldacci

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Carlos Mulas-Granados (Contact Author)

Government of the Kingdom of Spain - Economic Bureau of the President ( email )

28071 Madrid
Spain

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