Stress testing the federal fiscal anchor
Author
Faculty Advisor
Date
2023
Keywords
debt ratio, fiscal anchors, federal governments, Canada
Abstract (summary)
In order to provide a realistic assessment of the federal government’s multi-year fiscal plan, we use a Monte Carlo simulation model to investigate how the federal government’s debt ratio might evolve if the Canadian economy is subject to random growth rate shocks similar to those experienced over the last 40 years. The model generates 1,000 episodes of the evolution of the federal net-debt ratio over a 20-year time horizon when the economy is subject to annual growth-rate shocks. It indicates that there is a 30% chance that the federal debt-to-GDP ratio will be higher over a 10-year time horizon and a 53% chance that it will be higher over a 20-year time horizon. The likelihood of no recessions occurring over a 20-year time horizon is only 15%. This means that it is very unlikely that the federal projected debt ratios will be realized. In other words, taking the federal government’s projected primary surpluses at face value, but with random shocks to the growth rate that mimic past experience, the federal fiscal anchor will most likely be violated. The probabilities of one, two, and three or more recessions over a 20-year time horizon are 32%, 28%, and 25%, respectively. When two recessions occur, there is a 60% chance that the debt ratio will increase.
Publication Information
Dahlby, B. and Ferede, E. (2023). Stress Testing the Federal Fiscal Anchor. The Fraser Institute. https://www.fraserinstitute.org/studies/stress-testing-the-federal-fiscal-anchor#:~:text=This%20means%20that%20it%20is,will%20most%20likely%20be%20violated.
DOI
Notes
Item Type
Report
Language
Rights
Attribution-NonCommercial-ShareAlike (CC BY-NC-SA)
