A big challenge for the economic development of small island countries is dealing with external shocks. The Pacific Islands are vulnerable to natural disasters, climate change, commodity price changes, and uncertain donor grants. The question that arises is how should small developing countries formulate a fiscal policy to achieve economic stability and fiscal sustainability when prone to various shocks? We study how natural disasters affect long-term debt dynamics and propose fiscal policy rules that could help insulate the economy from such unexpected shocks. We propose fiscal rules to address these shocks and uncertainties using the example of Papua New Guinea. Our study finds the advantages of expenditure rules, especially a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. This paper contributes to the literature and policy dialogue by theoretically analyzing the impact of natural disasters on debt sustainability and proposing fiscal rules against natural disasters and climate changes. Our fiscal policy framework is practically applicable for many developing countries facing increasing frequency and impact of natural disasters and climate change. Our rules-based fiscal framework is crucial for sustainable and countercyclical macroeconomic policies to build resilience against devastating natural hazards.
not undermined . When a negative output gap is expected, the authorities may wish to temporarily reduce the adjustment pace and run higher primary deficits (and vice versa). Modifying the debt rule to allow for this kind of discretion is theoretically beneficial for macroeconomic stabilization. However, the discretionary feature could in the end turn the rule less transparent, if only because reliable output gap projections are arguably hard to obtain and agree upon.
C. ExpenditureRule with Debt Brake
36. Another option for Albania would be an expenditure
Inflation in Southeastern European (SEE) countries has been comparable with euro area inflation, partly owing to on the one hand, high initial price levels. On the other hand, the exchange rate regime is of paramount importance, including the inflation-targeting regime pursued in Albania. The analysis also explores additional heterogeneity between SEE and other regions. Two fiscal rules—a debt rule and an expenditure rule with a debt brake—are discussed in the context of Albania’s current economic outlook. Both rules will contribute toward enhancing fiscal sustainability in Albania.
only be eliminated asymptotically. The fiscal adjustment (or budget balance rule) to achieve the target each year during the adjustment period (from year t + 1 until year t + λ) is;
9 ( b t − b * ) / λ , ∀ b t ≠ b * .
This equation (9) is a simple linear adjustment rule. Depending on the preference of the fiscal authorities, other nonlinear adjustment rules are possible, too.
It is more important to have an expenditure rule than a revenue rule to reduce the procyclicality of the economy. This is because some countercyclical fiscal