Debt-financed fiscal stimulus in South Africa

Debt-financed fiscal stimulus programmes directly stimulate aggregate demand through government expenditure or tax cuts, but their effectiveness is highly dependent on direct crowding out of private sector expenditure, spillover effects to the a higher risk premium interest rates, and interaction between policy monetary policy. Using an open-economy dynamic stochastic general equilibrium model, we identify effect six different instruments (consumption spending, investment transfers, consumption taxes, capital labour taxes) short-term long-term (nominal real) rates. These disaggregated revenue shocks raise real yields 18 29 basis points, there are non-negligible differences in responses each instrument. Our main findings suggest that, context sustainability, investment-driven debt-financed programme would reduce debt-to-GDP ratio, especially periods economic slack when typically be more accommodative. In fact, since global financial crisis, has reduced burden adjustment response rising debt premium. But further could offset any gains from current stance (for example, credit rating shock raises bond rate by 155 points). We conclude that if remains unsustainable negative feedback loop increasing debt-servicing costs (through premium) rapid accumulation may push country into sovereign crisis distress.