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Is the Budget Deficit Sustainable when Fiscal Policy is nonlinear? The Case of Spain, 1961-2001

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Author Info
Oscar Bajo-Rubio () (U. de Castilla-La Mancha)
Carmen Díaz-Roldán () (U. de Castilla-La Mancha)
Vicente Esteve () (U. de Valencia)

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Abstract

In this paper we re-examine the long-run sustainability of budget deficits, when fiscal policy is conducted as a nonlinear process. Our empirical methodology makes use of recent developments on threshold cointegration that consider the possibility of a nonlinear relationship between government revenues and expenditures. The analysis is applied to the case of Spain, a country that has recently accomplished an important fiscal consolidation. Overall, our results suggest the presence of significant nonlinear effects in Spanish fiscal policy, so that fiscal authorities would cut deficits only if they are “large”, and assuring their long-run sustainability.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2003/32.

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Length: 20 pages
Date of creation: 2003
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Handle: RePEc:cea:doctra:e2003_32

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Related research
Keywords: Fiscal policy; Sustainability; Threshold cointegration.;

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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