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Alejandro Hajdenberg and Rafael Romeu

extended algorithm explicitly accounts for parameter estimates uncertainty in constructing the forecast fan chart, and uses a restricted VAR. The impact of parameter uncertainty in the debt fan chart forecast was limited, in part because of more precise estimates based on a country-specific policy reaction functions, long dated country-specific times series, and the exclusion of irrelevant variables in the VAR. Disregarding parameter uncertainty could be potentially important in other applications. In this sense, the paper presented a simple way to operationalize

International Monetary Fund. Research Dept.
This paper provides a brief overview of the latest research on the ability of forecasters to predict recessions. The paper highlights that few recessions have been forecast before their onset. Forecasters tend to be excessively cautious and do not revise their forecasts promptly and sufficiently to reflect incoming news. Nor do they fully take into account interdependence among economies. This paper also focuses on robust growth determinants highlighting that a fundamental problem confronting researchers is the lack of an explicit theory identifying the determinants of growth.
International Monetary Fund. Research Dept.

Volume 57 Number 1 Debt Overhang or Debt Irrelevance ? Tito Cordella, Luca Antonio Ricci, and Marta Ruiz-Arranz Decomposing Financial Risks and Vulnerabilities in Eastern Europe Andrea M. Maechler, Srobona Mitra, and Delisle Worrell Parameter Estimate Uncertainty in Probabilistic Debt Sustainability Analysis Alejandro Hajdenberg and Rafael Romeu SPECIAL SECTION: NEW PERSPECTIVES ON AFRICAN GROWTH AND DEVELOPMENT Catherine Pattillo, Editor Managing Resource Revenues in Developing Economies Paul Collier, Rick van der

International Monetary Fund. Research Dept.

Cordella, Luca Antonio Ricci and Marta Ruiz-Arranz Contents Decomposing Financial Risks and Vulnerabilities in Emerging Europe Andrea M. Maechler, Srobona Mitra and Delisle Worrell Parameter Estimate Uncertainty in Probabilistic Debt Sustainability Analysis Alejandro Hajdenberg and Rafael Romeu Managing Resource Revenues in Developing Economies Paul Collier, Rick Van Der Ploeg, Michael Spence and Anthony J. Venables Contents Prospects for Sustained Growth in Africa: Benchmarking the Constraints

Mr. Kei Kawakami and Rafael Romeu

in Litterman (1983) and Hajdenberg and Romeu (2010) , forecast uncertainty in this study reflects the uncertainty stemming from parameter estimates. Hence, at each step of the forecasting algorithm, macroeconomic aggregates and the primary balance are projected from a draw of the distribution of the estimated parameters, rather than the estimates themselves. Also, restrictions imposed on the forecasting of the macroeconomic fundamentals reduce noise in the projections and parameter estimate uncertainty is incorporated in to the forecast, similar to Tanner and

Mr. Kei Kawakami and Rafael Romeu
A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
International Monetary Fund. Research Dept.
Do highly indebted countries suffer from a debt overhang? Can debt relief foster their growth rates? To answer these important questions, this article looks at how the debt-growth relation varies with indebtedness levels, as well as with the quality of policies and institutions, in a panel of developing countries. The main findings are that, in countries with good policies and institutions, there is evidence of debt overhang when the net present value of debt rises above 20–25 percent of GDP; however, debt becomes irrelevant above 70–80 percent. In countries with bad policies and institutions, thresholds appear to be lower, but the evidence of debt overhang is weaker and we cannot rule out that debt is always irrelevant. Indeed, in such countries, as well as in countries with high indebtedness levels, investment does not depend on debt levels. The analysis suggests that not all countries are likely to profit from debt relief, and thus that a one-size-fits-all debt relief approach might not be the most appropriate one.
Mr. Evan C Tanner
This paper critically reviews recent work regarding the sustainability of public debt. It argues that Debt Sustainability Analyses (DSAs) should be more than mere mechanical simulation exercises. Instead, a DSA should be linked to some objective regarding the distribution of fiscal burdens and distortions over time (in the tradition of Barro’s 1979 tax smoothing objective). The paper discusses objective functions that yield simple and transparent fiscal policy rules.
Mr. Evan C Tanner

Imbalances: New Budget Measures for New Budget Priorities . ( Washington, DC : The American Enterprise Press ). Gourinchas , Pierre-Olivier and Jonathan A. Parker , 2001 , “ The Empirical Importance of Precautionary Saving ,” American Economic Review , Vol. 91 , No. 2 ( May ), pp. 406 – 12 . Hadjenberg , Alejandro and Rafael Romeu , 2010 , “ Parameter Estimate Uncertainty in Probabilistic Debt Sustainability Analysis ,” Staff Papers , International Monetary Fund , Vol. 57 ( September ), pp. 61 – 83 . Hoffmaister , A. W. , M