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The Impact of Macroeconomic Shocks on the Government Debt Dynamics: How Robust is the Fiscal Stance of the Czech Republic?

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  • Aleš Melecký
  • Martin Melecký

Abstract

This paper analyzes the effects of macroeconomic shocks on the government debt dynamics in an open economy using the analytical framework of Favero and Giavazzi (2007) extended to an open economy. Applying this modelling approach to the data for the Czech Republic, the authors derive some implications for fiscal policy. The modelling framework includes structural vector autoregression (SVAR) model, estimated using short-term identification restrictions, and non-linear specification of the government debt dynamics. The main variables of the analyzed system are GDP, inflation, the effective interest rate on government debt, government revenues and expenditures, the exchange rate and government debt. The estimation is carried out using the Bayesian approach. The results suggest that allowing for a non-linear dynamics in the government debt to GDP ratio could imply stronger persistence and higher volatility in the responses of government indebtedness to macroeconomic shocks. The fiscal stance of the Czech Republic seems to be most vulnerable to unexpected depreciation of the local currency, discretionary pro-cyclical increases in government expenditures, and deflationary shocks.

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Bibliographic Info

Article provided by University of Economics, Prague in its journal Politická ekonomie.

Volume (Year): 2012 (2012)
Issue (Month): 6 ()
Pages: 723-742

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Handle: RePEc:prg:jnlpol:v:2012:y:2012:i:6:id:874:p:723-742

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Related research

Keywords: structural vector autoregression model; open economy; non-linear dynamics; macroeconomic shocks; government debt; Czech Republic; bayesian estimation;

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References

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  1. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the effects of fiscal policy," Working Papers 07-4, Federal Reserve Bank of Boston.
  2. Melecky, Ales & Skutova, Marketa, 2011. "Fiskální pravidla v zemích Visegrádské čtyřky
    [Fiscal Rules in the Visegrad Countries]
    ," MPRA Paper 34028, University Library of Munich, Germany.
  3. An, Sungbae & Schorfheide, Frank, 2005. "Bayesian Analysis of DSGE Models," CEPR Discussion Papers 5207, C.E.P.R. Discussion Papers.
  4. Ricardo M. Sousa & António Afonso, 2008. "The Macroeconomic Effects of Fiscal Policy," NIPE Working Papers 22/2008, NIPE - Universidade do Minho.
  5. Dybczak, Kamil & Melecky, Martin, 2011. "Macroeconomic Shocks and the Fiscal Stance within the EU: A Panel Regression Analysis," MPRA Paper 33684, University Library of Munich, Germany.
  6. Vladimir Klyuev & Stephen Snudden, 2011. "Effects of Fiscal Consolidation in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(4), pages 306-326, August.
  7. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  8. Alessandro Missale & Francesco Giavazzi, 2003. "Public Debt Management in Brazil," Development Working Papers 178, Centro Studi Luca d\'Agliano, University of Milano.
  9. Emilia Câmpeanu & Andreea Stoian, 2010. "Fiscal Policy Reaction in the Short Term for Assessing Fiscal Sustainability in the Long Runin Central and Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 501-518, December.
  10. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  12. Schuknecht, Ludger & Tanzi, Vito, 2005. "Reforming public expenditure in industrialised countries: are there trade-offs?," Working Paper Series 0435, European Central Bank.
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