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A model-based indicator of the fiscal stance

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  • Polito, Vito
  • Wickens, Mike

Abstract

We argue that the conventional approach to assessing the fiscal stance based on econometric tests of the government present value budget constraint (PVBC) is of limited practical use. We propose an alternative measure that focuses on short-run fluctuations in the fiscal stance, namely, a model-based indicator that compares a target level of the debt-GDP ratio at a given point in the future with a forecast based on the government budget constraint (GBC) where the forecasts are obtained using a recursively estimated VAR. By log-linearising the GBC the index can be decomposed into the various different components of which it is comprised. Using data from 1970 to 2011 we conduct a detailed time-series study of the fiscal stances of four countries: the United States, the United Kingdom, Germany and Greece and we calculate the index for 11 other EU countries. For most countries the index shows that their fiscal stances vary from being too loose to too tight. Almost without exception the index drops sharply from 2007 showing the harmful effect on their fiscal stances of the recent recession.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 3 ()
Pages: 526-551

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:526-551

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Budget deficits; Government debt; Fiscal sustainability; VAR analysis; Economic policy;

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References

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Cited by:
  1. Daniel, Betty C. & Shiamptanis, Christos, 2013. "Pushing the limit? Fiscal policy in the European Monetary Union," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2307-2321.
  2. Marta Gómez-Puig & Simón Sosvilla-Rivero & María del Carmen Ramos-Herrera, 2014. "“An Update on EMU Sovereign Yield Spread Drivers in Times of Crisis: A Panel Data Analysis”," IREA Working Papers 201407, University of Barcelona, Research Institute of Applied Economics, revised Mar 2014.
  3. Jasper Lukkezen & Hugo Rojas-Romagosa, 2012. "When is debt sustainable?," CPB Discussion Paper 212, CPB Netherlands Bureau for Economic Policy Analysis.
  4. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "“EMU sovereign debt market crisis: Fundamentals-based or pure contagion?”," IREA Working Papers 201402, University of Barcelona, Research Institute of Applied Economics, revised May 2014.

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