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Huixin Bi, Ms. Wenyi Shen, and Susan Yang Shu-Chun

macroeconomic shock in both output and inflation. As a result, an initial smaller inflation response generates smaller debt devaluation effects and less positive output responses throughout the simulation periods, making the government debt-to-output ratio increase more than with a less active rule. For the sensible range of the response magnitudes to inflation, the effect difference in adding debt burden is nonetheless small. In the analysis with an exogenous policy rate shock, we find that government debt burden as a share of output rises relative to the path without the

International Monetary Fund
Until recently, Croatia's economic performance was the envy of many countries in transition: a successful stabilization effort in late 1993 was followed by virtual price stability and real GDP growth of 6 percent a year during 1994–97. Monetary tightening, the weak economy, and a drying-up of repatriated foreign savings exposed the underlying insolvency of a group of rapidly growing banks. Executive Directors emphasized that the task of restoring fiscal balance could not be accomplished without redressing the finances of the pension and health care systems.
Huixin Bi, Ms. Wenyi Shen, and Susan Yang Shu-Chun
This paper studies the main channels through which interest rate normalization has fiscal implications in the United States. While unexpected inflation reduces the real value of government liabilities, a rising policy rate increases government financing needs because of higher interest payments and lower real bond prices. After an initial decline, the real government debt burden rises even with higher tax revenues in an expansion. Given the current net debt-to-GDP ratio at around 80 percent, interest rate normalization leads to a negligible increase in the sovereign default risk of the U.S. federal government, despite a much higher federal debt-to-GDP ratio than the post-war historical average.