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Fiscal Reaction Functions Across the World: In Quest of Statistical (In)significance

Author

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  • António Afonso
  • João Tovar Jalles

Abstract

We estimate fiscal reaction functions for a panel of 173 countries using data between 1970 and 2014. Most notably, we assess the existence of non-Ricardian regimes, as postulated in the fiscal theory of the price level (FTPL), or, contrarily, the possibility of Ricardian regimes. We find that governments have on average increased the primary balance as a response to higher previous government indebtedness, implying a Ricardian fiscal regime. In addition, the Ricardian results are confirmed for the advanced countries and for the euro area group. A more Ricardian fiscal regime emerged after 1995 and notably in the subperiod 2008-2014, after the global financial crisis (before that, statistical insignificance is the norm). From a P-VAR analysis, we find that increases in government indebtedness increase primary balances, supporting overall the existence of an average Ricardian fiscal regime.

Suggested Citation

  • António Afonso & João Tovar Jalles, 2019. "Fiscal Reaction Functions Across the World: In Quest of Statistical (In)significance," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 75(3), pages 207-228.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2018-0023
    DOI: 10.1628/fa-2018-0023
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    Citations

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    Cited by:

    1. Afonso, António & Carvalho, Francisco Tiago, 2022. "Time-varying cyclicality of fiscal policy: The case of the Euro area," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    2. António Afonso & Francisco Tiago Carvalho, 2021. "Euro area time-varying cyclicality of fiscal policy," Working Papers REM 2021/0202, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    3. Benjamin Owusu & Bettina Bökemeier & Alfred Greiner, 2023. "Assessing nonlinearities and heterogeneity in debt sustainability analysis: a panel spline approach," Empirical Economics, Springer, vol. 64(3), pages 1315-1346, March.

    More about this item

    Keywords

    fiscal reaction function; panel data; panel VAR; cross-sectional dependence; global financial crisis;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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