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Policy Mix and Debt Sustainability: Evidence from Fiscal Policy Rules

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  • Peter Claeys

Abstract

This paper characterises rules-based fiscal policy setting. Basically, we translate a standard monetary policy rule into a simple fiscal policy rule. We then infer on fiscal policymakers' reaction coefficients by testing the rule with GMM. Interaction is also tested directly by the inclusion of monetary policy setting. Our results qualify existing evidence on systematic fiscal policy in two respects. First, fiscal policy usually stabilises public debt. And there is indeed substantial interaction between fiscal and monetary policy via the debt channel. Second, sustainability is achieved with a “stop-go” cycle of consolidation. Consolidation does not come at the cost of less cyclical stabilisation unless debt ratios are high.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-02/cesifo1_wp1406.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1406.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1406

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Keywords: monetary policy; fiscal policy; policy interaction and policy rules; debt sustainability;

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Cited by:
  1. Afonso, António & Toffano, Priscilla, 2013. "Fiscal regimes in the EU," Working Paper Series, European Central Bank 1529, European Central Bank.
  2. Tagkalakis, Athanasios, 2011. "Fiscal policy and financial market movements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(1), pages 231-251, January.
  3. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Government solvency and financial markets: Dynamic panel estimates for the European Monetary Union," Economics Letters, Elsevier, Elsevier, vol. 115(1), pages 130-133.
  4. Reicher, Claire, 2014. "Systematic fiscal policy and macroeconomic performance: A critical overview of the literature," Economics Discussion Papers 2014-29, Kiel Institute for the World Economy.
  5. Tagkalakis, Athanasios, 2013. "The effects of financial crisis on fiscal positions," European Journal of Political Economy, Elsevier, Elsevier, vol. 29(C), pages 197-213.
  6. Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2007. "To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3," CESifo Working Paper Series 1919, CESifo Group Munich.
  7. Athanasios Tagkalakis, 2011. "Asset price volatility and government revenue," Working Papers, Bank of Greece 133, Bank of Greece.
  8. Flanagan, Kieron & Uyarra, Elvira & Laranja, Manuel, 2010. "The ‘policy mix’ for innovation: rethinking innovation policy in a multi-level, multi-actor context," MPRA Paper 23567, University Library of Munich, Germany.
  9. Marian Dobranschi, 2010. "The sustainability of public debt in Romania in economic and financial crisis," Studies and Scientific Researches. Economics Edition, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, "Vasile Alecsandri" University of Bacau, Faculty of Economic Sciences, issue 15.
  10. Athanasios Tagkalakis, 2012. "Fiscal policy and asset price volatility," Empirica, Springer, Springer, vol. 39(1), pages 123-156, February.
  11. Christopher Reicher, 2009. "Fiscal Taylor Rules in the Postwar United States," Kiel Working Papers 1509, Kiel Institute for the World Economy.
  12. Schalck, Christophe, 2012. "Investigating heterogeneity in European fiscal behaviours," Research in Economics, Elsevier, Elsevier, vol. 66(4), pages 383-390.
  13. Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2009. "To react or not? Technology shocks, fiscal policy and welfare in the EU-3," European Economic Review, Elsevier, Elsevier, vol. 53(6), pages 689-714, August.
  14. Flanagan, Kieron & Uyarra, Elvira & Laranja, Manuel, 2011. "Reconceptualising the 'policy mix' for innovation," Research Policy, Elsevier, Elsevier, vol. 40(5), pages 702-713, June.

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