It has become apparent in recent years is that advanced economy government bond markets can also experience investor outflows, and associated runs. Our new research shows that advanced economies’ exposure to refinancing risk and changes in government borrowing costs depend mainly on who is holding the bonds— the demand side for government debt. Tracking who owns what, when and for how long can shed some light on potential risks in advanced economies’ government debt markets.
The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis. Our analysis shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP.
Today, fiscal problems are a key concern of policy makers in many industrial countries, and a reassessment of sovereign risk is a palpable threat to global recovery. At the heart of the issue is the extent to which governments have room for fiscal maneuver—“fiscal space”—before markets force them to tighten policies sharply and, relatedly, the size of adjustments needed to restore or maintain public debt sustainability. Yet, much of the talk about fiscal space—how to measure it and the policy implications—has so far been rather fuzzy. In this blog, Jonathan Ostry discusses a new staff position note that he co-authored with several IMF colleagues, which aims to remedy this by providing an operational definition of the fiscal space concept as well as estimates of fiscal space for 23 advanced economies.