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

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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
Date of revision:
Handle: RePEc:cea:doctra:e2003_32

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Keywords: Fiscal policy; Sustainability; Threshold cointegration.;

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Citations

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Cited by:
  1. Holmes, Mark J., 2011. "Threshold cointegration and the short-run dynamics of twin deficit behaviour," Research in Economics, Elsevier, vol. 65(3), pages 271-277, September.
  2. Fan, Jingwen & Arghyrou, Michael G, 2011. "UK Fiscal Policy Sustainability, 1955-2006," Cardiff Economics Working Papers E2011/9, Cardiff University, Cardiff Business School, Economics Section.
  3. Piergallini, Alessandro, 2012. "Non-Linear Fiscal Regimes and Interest Rate Policy," MPRA Paper 42671, University Library of Munich, Germany.
  4. Chen, Shyh-Wei, 2014. "Testing for fiscal sustainability: New evidence from the G-7 and some European countries," Economic Modelling, Elsevier, vol. 37(C), pages 1-15.
  5. Escario, Regina & Gadea, María Dolores & Sabaté, Marcela, 2012. "Multicointegration, seigniorage and fiscal sustainability. Spain 1857–2000," Journal of Policy Modeling, Elsevier, vol. 34(2), pages 270-283.
  6. Piergallini, Alessandro & Postigliola, Michele, 2013. "Non-Linear Budgetary Policies: Evidence from 150 Years of Italian Public Finance," MPRA Paper 48922, University Library of Munich, Germany.
  7. Chin-Hong Puah Author_Email: chpuah@feb.unimas.my & Evan Lau & Hui-Fern Teo, 2011. "Testing Budget Sustainability In Sarawak State," 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding 2011-221, Conference Master Resources.
  8. Gabriella Deborah Legrenzi & Costas Milas, 2012. "Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS," CESifo Working Paper Series 4001, CESifo Group Munich.
  9. Bajo-Rubio, Oscar & Díaz-Roldán, Carmen & Esteve, Vicente, 2009. "Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level," European Journal of Political Economy, Elsevier, vol. 25(4), pages 525-539, December.
  10. Congregado, Emilio & Golpe, Antonio A. & Carmona, Mónica, 2010. "Is it a good policy to promote self-employment for job creation? Evidence from Spain," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 828-842, November.
  11. Holmes, Mark J. & Shen, Xin, 2013. "A note on the average propensity to consume, wealth and threshold adjustment," Economic Modelling, Elsevier, vol. 35(C), pages 309-313.
  12. Trachanas, Emmanouil & Katrakilidis, Constantinos, 2013. "Fiscal deficits under financial pressure and insolvency: Evidence for Italy, Greece and Spain," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 730-749.
  13. Tsong, Ching-Chuan & Wu, Chien-Wei & Chiu, Hsien-Hung & Lee, Cheng-Feng, 2013. "Covariate unit root tests under structural change and asymmetric STAR dynamics," Economic Modelling, Elsevier, vol. 33(C), pages 101-112.
  14. Regina Escario & María Dolores Gadea & Marcela Sabaté, 2009. "Government Solvency or just Pseudo-Sustainability? a Long-Run Multicointegration Approach for Spain," Documentos de Trabajo dt2009-07, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.
  15. Ghassan, Hassan B. & AlDehailan, Salman, 2009. "اختبار التكامل المشترك غير الخطي بين الاستثمار الحكومي والاستثمار الخاص في الاقتصاد السعودي
    [Test of Non Linear Cointe
    ," MPRA Paper 56376, University Library of Munich, Germany, revised 04 Dec 2009.

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