Making Fiscal Adjustments Using Event Probability Forecasts in OECD Countries

Abstract

This paper describes an approach to making fiscal policy decisions based on probabilistic statements on the likely occurrence of events as specified in a rules‐based framework for making fiscal adjustments. The event probability forecasts are obtained from a simple time series econometric model of the key variables influencing debt dynamics (interest rates, output and debt itself). The approach is applied to data for ten developed countries for 1956–2016 and the analysis demonstrates the importance of accommodating international linkages in forecasting, noting that failure to do so would have led to excessive fiscal cutbacks and austerity in recent years.