Fiscal uncertainty with donor herding and domestic debt crisis

Stellenbosch Working Paper Series No. WP07/2006
 
Publication date: 2006
 
Author(s):
[protected email address] (Department of Economics, Stellenbosch University)
 
Abstract:

This study attempts to analyse how uncertainty about future government spending affects the representative individual’s lifetime utility by using a discrete inter-temporal optimizing model. Intuitively, the study shows that the overall effect of a highly positive domestic-debt repayment gap is such that the expected government spending for the next period will go down. The implication of the reduction in government spending due to uncertainty about future debt servicing is that the output and the corresponding investment for the next period will be expected to go down. This outcome is further reinforced by the higher taxes imposed on consumers in an attempt to minimise the next period’s domestic-debt repayment gap.

 
JEL Classification:

E6, F3

Keywords:

Donor herding behavior, domestic debt crisis, fiscal uncertainty, domestic-debt, repayment gap, government spending

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22 February 2021
As is often the case, domestic financial markets largely ignored local developments, including a lower-than-expected January consumer inflation print, last week and were swept along by the intensification of the global reflation trade. Outside of the inflation release, the domestic data releases continued to show that there was still some recovery momentum...

Read the full issue