Debt limits and fiscal space for some Latin American economies

This paper provides evidence on the debt limits and fiscal space for some Latin American emerging economies under the fiscal fatigue approach (Ghosh et al., 2013). We propose the spline technique to estimate each government's reaction function and the sovereign risk premium endogenous to the country's indebtedness. Estimates were made with an unbalanced panel of 13 economies-six from Latin America-for the period 1980-2018. The results vary importantly across the countries. They suggest, for instance, that the Colombian public debt limit would be close to 68% of GDP and that the fiscal space-the gap between the current debt level and the estimated debt limit-would reach 16 percentage points. Among the other Latin American economies, Peru and Chile have the largest fiscal space (50% and 39%, respectively), while Ecuador has the lowest (13%). The findings for Mexico look like those of Colombia.