Abstract

This paper applies dynamic stochastic simulation methods to assess sustainable public debt management policies in Zimbabwe. The methodology applied involves estimating a fiscal reaction function and using it to simulate public debt path using a stochastic approach and historical information on drivers of public debt accumulation and their volatility. The results from the baseline scenario show that Zimbabwe’s public debt would not deviate much from the desired regional indicative target in the SADC region of 60 percent in the medium to long-term. The policy implication is the need for policy makers to proactively respond to the changing macroeconomic environment and to implement countercyclical fiscal policies to limit the probability of debt from exploding.

Key words: Public debt dynamics, debt sustainability, stochastic simulation, fiscal reaction function.

Abbreviation

JEL Classification: H63