A man rides his bicycle past a graffiti, amidst the spread of the coronavirus disease (COVID-19), in New Delhi, India, July 17, 2020.

Publication Type

Does the new fiscal consensus in advanced economies travel to emerging markets?

Olivier Blanchard (PIIE), Josh Felman (JH Consulting) and Arvind Subramanian (PIIE)

Policy Briefs 21-7
Photo Credit: REUTERS/Adnan Abidi

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A new consensus on fiscal policy has emerged in advanced economies, that stimulus is both needed and feasible. At first blush, the scope for stimulus seems even greater in emerging markets, since their primary deficits are smaller and interest-growth differentials more favorable, suggesting that they can sustain much higher levels of debt. But more careful analysis suggests that this is not the case. The authors point out that what matters for debt sustainability are not current conditions but rather the range of possible future outcomes. And prospects for interest rates and growth are more uncertain in emerging markets, while primary balances are more difficult to adjust. As a result, debt limits are in fact tighter than advanced economies. Taking India as a case study, the authors argue that what is needed in the current situation is responsible, slow fiscal adjustment. More generally, one should be careful about importing wholesale the new fiscal consensus into emerging markets.

Data Disclosure:

The data underlying this analysis are available here.