This paper aims to investigate Emerging Market Countries’ sustainability issues, looking at the impact of two specific policies aiming to improve the public finances outlook. The developed methodology consists in Monte-Carlo simulations building on an instrumented quantile regression fiscal reaction function (which allows countries to have different fiscal reactions to a change in their economic environment) and on a VAR model allowing the behavior of the economic variables having an impact on debt dynamics to be simulated. The idea is to investigate beyond the existing literature, which assumes a fiscal reaction common to all countries and no country- specific foreign currency risk premium, to see which lever (more responsive fiscal policy or lower reliance on foreign currency denominated debt) is the most appropriate to enhance sustainability.
Amundi Working Paper - May 2016
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