Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies


  • We thank Olivier Blanchard, Henning Bohn, David Romer, two anonymous referees and the editor, Wouter den Hann, as well as participants at the IMF's 11th Annual Jacques Polak Research Conference, the Econometric Society Australasian Meeting 2011 and Stockholm School of Economics Research Seminar Series, for helpful comments and suggestions. Any errors are the authors’ responsibility. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board or its management.

Corresponding author: Atish R. Ghosh, IMF Research Department, HQ1-09-612, 700 19th Street NW, Washington, DC 20431, USA. Email:


How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic model of sovereign default in which risk-neutral investors lend to a government that displays ‘fiscal fatigue’, whereby its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled over. Using data for 23 advanced economies over the period 1970–2007, we find evidence of a fiscal reaction function with these features, and use it to compute ‘fiscal space’, defined as the difference between current debt ratios and the estimated debt limits.