New Working Paper Presents Formula for Assessing National Fiscal Vulnerability

October 10, 2007

New Working Paper Presents Formula for Assessing National Fiscal Vulnerability

Measuring a nation’s fiscal vulnerability is a tricky proposition at best, but a new Kennedy School Working Paper proposes a new calculation that could provide a much more accurate assessment than previous formulas.

“A Balance-Sheet Approach to Fiscal Sustainability,” co-authored by Federico Sturzenegger, lecturer of public policy and former secretary of economic policy for the Republic of Argentina, presents a new methodology to assess the fiscal sustainability of a country based on the estimation of its net worth and its distribution as a function of a changing macroeconomic environment.

The key insight of the paper is that both the asset and liabilities sides of the balance sheet must be examined. Governments assets are, primarily, the present value of taxes. Government liabilities include outstanding debt but also the present value of government future payments of items such as wages and pensions.

The authors test their hypothesis by applying a proposed balance-sheet approach to the economies of Argentina and Chile.

“The finding that a partially dollarized country like Argentina holds a roughly balanced dollar position illustrates how fiscal sustainability, rather than on the composition of explicit liabilities, ultimately depends in a complex way on the overall structure of revenues and expenditures, of which debt represents but a small fraction,” the authors write.

Sturzenegger and co-author Eduardo Levy-Yeyati contend that their analysis sheds new light on a complex topic, but will certainly not be the last word. “The examples [cited] highlight the need to revisit the way in which the currency exposure and the sensitivity to real devaluations of partially dollarized economies is usually assessed.”

Sturzenegger teaches applied macroeconomics and the policy challenges of globalization. He is a regular consultant for international organizations and local and foreign corporations on antitrust issues, strategy, and economic forecasting.

Access the Working Paper on the Kennedy School Working Papers website. The active URL for the Working Paper is: http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP07-044


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