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Why Fiscal Regimes Matter for Fiscal Sustainability

Author

Listed:
  • Pierre Aldama
  • Jérôme Creel

Abstract

This paper introduces a Regime-Switching Model-Based Sustainability test allowing for periodic (or local) violations of Bohn (1998, QJE)’s sustainability condition. We assume a Markov-switching fiscal policy rule whose parameters stochastically switch between sustainable and unsustainable regimes. We demonstrate that long-run (or global) fiscal sustainability not only depends on regime-specific feedback coefficients of the fiscal policy rule but also on the average durations of fiscal regimes. Evidence on French data suggests that both the No-Ponzi Game condition and the Debt-stabilizing condition hold in the long run, when accounting for fiscal regimes, contrary to standard MBS tests. Drawing on former evidence about the characteristics of monetary policy in France, we discuss about the proper specification of the monetary-fiscal policy mix since 1965.

Suggested Citation

  • Pierre Aldama & Jérôme Creel, 2020. "Why Fiscal Regimes Matter for Fiscal Sustainability," Working papers 769, Banque de France.
    • Handle: RePEc:bfr:banfra:769
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/wp769_0.pdf
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    Citations

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    Cited by:

    1. Aldama, Pierre & Creel, Jérôme, 2019. "Fiscal policy in the US: Sustainable after all?," Economic Modelling, Elsevier, vol. 81(C), pages 471-479.
    2. repec:hal:spmain:info:hdl:2441/19bkog4p4c9i4bi1t86h4tt9ri is not listed on IDEAS
    3. Jerome Creel, 2020. "Fiscal space in the euro area before Covid-19," Economics Bulletin, AccessEcon, vol. 40(2), pages 1698-1706.
    4. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, vol. 12(24), pages 1-20, December.
    5. William Irungu Nganga & Julien Chevallier & Simon Wagura Ndiritu, 2018. "Regime changes and fiscal sustainability in Kenya with comparative nonlinear Granger causalities across East-African countries," Working Papers halshs-01941226, HAL.
    6. repec:hal:spmain:info:hdl:2441/7suq9gqkp186e8d6eou29dipgk is not listed on IDEAS

    More about this item

    Keywords

    Fiscal Rules; Fiscal Regimes; Public Debt Sustainability; Time-Varying Parameters; Markov-Switching Models.;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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