Mind the Gap: Debt Limit and Fiscal Stimulus Debt Limit

Title                    : Mind the Gap: Debt Limit and Fiscal Stimulus Debt Limit

Volume              : WP201901

Writer(s)            : Fatih Özatay

Language           : English

Date                   : October 2019

Abstract             : Debt limit is public debt-to-GDP ratio above which financial markets stop lending to a sovereign. How wide the fiscal space –the difference between the current debt ratio and the debt limit- is essential for policymakers. However, this information ceases to be useful regarding up to which point in the fiscal space policymakers can take fiscal stimulus measures. We define “fiscal stimulus debt limit” as the debt ratio, beyond which fiscal stimulus leads to output losses relative to a no fiscal response case. We use this concept in a DSGE model and show that the gap between two limits is significant.

Keywords          :Debt limit, Fiscal space, Fiscal stimulus, Recession, Default risk

JEL Classification : E62 H62 H63

You may read working paper from here.