Public Debt Targeting An Application to the Caribbean

This paper proposes a fiscal policy framework we call Public Debt Targeting. The framework seeks to smooth primary spending over the business cycle while remaining consistent with public debt sustainability. Under the proposed framework, a government announces a commitment to a public debt band trajectory over the medium term, while sequentially announcing primary expenditures for the next budget cycle, which are determined recursively based on the history of shocks. Public debt targeting differs from a structural balance rule in that it internalizes the effect of the deterioration in creditworthiness from fiscal deficits and public debt accumulation, which tend to affect sovereign spreads, interest rates, exchange rates, and economic activity. The proposed framework is applied to Caribbean economies, which in general show high levels of public debt and procyclical primary expenditure.Economic models;Government expenditures;public debt, primary expenditure, fiscal policy, debt accumulation, debt sustainability, aggregate demand, fiscal framework, fiscal rules, debt dynamics, government spending, sovereign debt, expenditure growth, domestic currency, fiscal policy framework, debt obligations, debt threshold, fiscal sustainability, excessive debt, fiscal deficits, government expenditure, debt thresholds, fiscal stance, government debt, discretionary fiscal policy, government deficit, fiscal surpluses, fiscal council, budget deficits, fiscal affairs department, commercial debt, terms of debt, fiscal behavior, debt reduction, debt stock, international lending, government deficits, interest expenditure, fiscal affairs, excessive deficits, debt structure, national budget, debt crisis, government bailout, fiscal revenues, debt problems, tax base, foreign currency debt, fiscally sustainable, budget projections, fiscal balances, sovereign debtor, fiscal policies, fiscal imbalances, foreign borrowing, fiscal discipline, fiscal policy rules, fiscal finances, budget projection, expenditure increase, sovereign defaults, fiscal consolidation, fiscal projections, fiscal resources, reserve bank, public spending, structural fiscal, public expenditure, debt ratio, fiscal institutions, domestic debt, expenditure adjustment, debt stocks, fiscal policy prescriptions, fiscal prudence, amount of debt, fiscal consolidations, stock of debt, keynesian fiscal policy, debt intolerance, currency debt, domestic financial markets, market debt, fiscal policy management, fiscal balance, budget process, taxation, fiscal performance, fiscal accounting, fiscal policy outcomes, tax policy, debt management