Boosting Fiscal Space

The aftermath of the global financial crisis has left many advanced economies with very high sovereign debt ratios and some emerging markets with high debt. This report considers whether there are ways to expand fiscal space that do not involve countries paying down debt or promising to do so in the future.

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Can debt management policy provide a way to increase fiscal space for a given path of primary fiscal balances? This report explores the role of two such policies: issuance of state-contingent debt; and issuance of longer maturity debt. New analytical models determine the debt limit and the default risk under uncertainty, and undertake numerical simulations to gauge the practical significance of the effect of debt management policies on fiscal space. The results suggest that, by managing debt along these two dimensions, economically salient gains in fiscal space are plausible for advanced and emerging markets.