Fiscal Fatigue, Public Debt Structure and Sustainability: A DSGE Model for West African Economic and Monetary Union

• Published in: International economic journal Vol. 38; no. 2; pp. 312 - 344
• Main Author: Amedanou, Isaac
• Format: Journal Article
• Language: English
• Published: Abingdon Routledge 01.06.2024; Taylor & Francis Ltd; Taylor & Francis (Routledge); 한국국제경제학회
• Subjects: Banking; Borrowing; Central banks; Debt; debt structure; debt sustainability; DSGE; Fatigue; Finance; Fiscal fatigue; Government; Households; Investments; Long term debt; Monetary unions; Natural resources; Public debt; Public finance; Quantitative Finance; Sustainability; Taxation; Trade; WAEMU; 경제학; Fiscal fatigue; debt structure; debt sustainability; DSGE; WAEMU
• ISSN: 1016-8737; 1743-517X
• DOI: 10.1080/10168737.2024.2302819

The present paper simulates several financing schemes for scaling-up public investment while stabilizing debt in WAEMU countries experiencing fiscal fatigue. We construct a DSGE model of a small open economy that incorporates the behaviour of four types of agents: firms, households, government, and the Central Bank. The analysis assumes that when the government faces fiscal fatigue, it can turn to debt to finance the scaling-up of public investment. To ensure long-term debt sustainability, fiscal adjustments are consistently implemented through transfers and/or taxes, subject to respective caps and floors. Simulations indicate that, in the presence of natural resource revenues, scaling up public investment is feasible using concessional borrowing only or by incorporating additional external commercial or domestic borrowing while maintaining debt sustainability. Otherwise, external commercial debt appears to carry more risk.