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Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS

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  • Gabriella Deborah Legrenzi
  • Costas Milas

Abstract

We extend previous work on the sustainability of the government’s intertemporal budget constraint by allowing for non-linear adjustment of the fiscal variables, conditional on (i) the sign of budgetary disequilibria and (ii) the phase of the economic cycle. Further, our endogenously estimated threshold for the non-linear adjustment is not fixed; instead it is allowed to vary over time and during financial crises. Our analysis presents particular interest within the current economic scenario of financial crises, poor growth and debt crises. Our empirical analysis, applied to the GIPS, shows evidence of a threshold behaviour for the GIPS, that only correct “large” unbalances, which, in the case of Greece and Portugal, are higher than the EGSP criteria. Financial crises further relax the threshold for adjustment: during financial crises, only “very large” budgetary unbalances are corrected.

Suggested Citation

  • 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.
    • Handle: RePEc:ces:ceswps:_4001
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    Cited by:

    1. Alessandro Piergallini, 2019. "Nonlinear policy behavior, multiple equilibria and debt-deflation attractors," Journal of Evolutionary Economics, Springer, vol. 29(2), pages 563-580, April.
    2. Piergallini, Alessandro, 2012. "Non-Linear Fiscal Regimes and Interest Rate Policy," MPRA Paper 42671, University Library of Munich, Germany.

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    More about this item

    Keywords

    debt sustainability; fiscal adjustment; nonlinear models;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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