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Assessing effective sustainability of fiscal policy within the G-7

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  • Fève, Patrick
  • Hénin, Pierre-Yves

Abstract

This paper introduces a new unit root test, using "Feedback Covariates", in order to test for sustainability of fiscal policy within the G-7.Non-sustainability is considered as the null hypothesis of both a unit root in the debt process and the nullity of a deficit correction in response to inherited debt. We characterize the distribution of the FADF (Feedback Augmented Dickey-Fuller) statistics under both the null and the near unit root alternative and we compare the FADF statistics with the ones related to single equation approaches. This test is applied to public debt normalized by GDP, rather than by a discount factor, consistently with a definition of effective sustainability, which focusses on policy implications. We are still unable to reject the null hypothesis of non-sustainability for four countries. Nevertheless, our results confirm the potential of our approach in terms of power gains aind show that standard unit root tests lead to accept too often the null hypothesis of non-stationnarity.

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Bibliographic Info

Paper provided by CEPREMAP in its series CEPREMAP Working Papers (Couverture Orange) with number 9815.

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Length: 128 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:cpm:cepmap:9815

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  1. Michael Artis & Massimiliano Marcellino, . "Fiscal Solvency and Fiscal Forecasting in Europe," Working Papers 142, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  3. Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 409-17, October.
  4. Steven A. Symansky & Douglas Laxton & Hamid Faruqee, 1996. "Government Debt, Life-Cycle Income and Liquidity Constrains," IMF Working Papers 96/140, International Monetary Fund.
  5. Elliott, Graham & Stock, James H., 1994. "Inference in Time Series Regression When the Order of Integration of a Regressor is Unknown," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 672-700, August.
  6. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-71, February.
  7. Robert Holzmann & Yves Hervé & Roland Demmel, 1996. "The maastricht fiscal criteria: Required but ineffective?," Empirica, Springer, vol. 23(1), pages 25-58, February.
  8. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
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  10. Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 291-306, August.
  11. Peter C.B. Phillips, 1986. "Towards a Unified Asymptotic Theory for Autoregression," Cowles Foundation Discussion Papers 782R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1986.
  12. Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
  13. repec:cup:etheor:v:10:y:1994:i:3-4:p:672-700 is not listed on IDEAS
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  15. Wickens, M. R. & Uctum, Merih, 1993. "The sustainability of current account deficits : A test of the US intertemporal budget constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 423-441, May.
  16. Willem H. Buiter & Urjit R. Patel, 1990. "Debt, Deficits and Inflation: An Application to the Public Finances of India," NBER Working Papers 3287, National Bureau of Economic Research, Inc.
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  18. Bruce E. Hansen, 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Boston College Working Papers in Economics 300., Boston College Department of Economics.
  19. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
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  22. Hamid Faruqee & Douglas Laxton & Steven Symansky, 1997. "Government Debt, Life-Cycle Income, and Liquidity Constraints: Beyond Approximate Ricardian Equivalence," IMF Staff Papers, Palgrave Macmillan, vol. 44(3), pages 374-382, September.
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Cited by:
  1. J. Boissinot & C. L'Angevin & B. Monfort, 2004. "Public Debt Sustainability: Some Results on the French Case," Documents de Travail de la DESE - Working Papers of the DESE g2004-10, Institut National de la Statistique et des Etudes Economiques, DESE.
  2. António Afonso & Christophe Rault, 2007. "What We Really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," Working Papers Department of Economics 2007/20, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  3. 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.
  4. Gerrit B. Koester & Christoph Priesmeier, 2013. "Does Wagner´s Law Ruin the Sustainability of German Public Finances?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(3), pages 256-288, September.
  5. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers Department of Economics 2000/12, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  6. Ahmad Zubaidi Baharumshah & Evan Lau, 2005. "Regime Changes And The Sustainability Of Fiscal Imbalance In East Asian Countries," Macroeconomics 0504001, EconWPA.
  7. Gabriella Deborah Legrenzi & Costas Milas, 2010. "Spend-and-Tax Adjustments and the Sustainability of the Government's Intertemporal Budget Constraint," CESifo Working Paper Series 2926, CESifo Group Munich.
  8. António Afonso & João Tovar Jalles, 2011. "A Longer-run Perspective on Fiscal Sustainability," Working Papers Department of Economics 2011/17, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  9. Massimo Antonini & Kevin Lee & Jacinta Pires, . "Public Sector Debt Dynamics: The Persistence and Sources of Shocks to Debt in Ten EU Countries," Discussion Papers 11/08, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  10. Georgios Chortareas & George Kapetanios & Merih Uctum, 2003. "A Nonlinear Approach to Public Finance Sustainability in Latin America," Working Papers 486, Queen Mary, University of London, School of Economics and Finance.
  11. Wolfgang Kitterer, 2007. "Nachhaltige Finanz- und Investitionspolitik der Bundesländer," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(s1), pages 53-83, 04.
  12. Samuel S Jibao & Niek Schoeman & Ruthira Naraidoo, 2010. "Fiscal Regime Changes and the Sustainability of Fiscal Imbalance in South Africa: A Smooth Transition Error-Correction Approach," Working Papers 201023, University of Pretoria, Department of Economics.
  13. Evan Tanner & Issouf Samaké, 2006. "Probabilistic Sustainability of Public Debt," IMF Working Papers 06/295, International Monetary Fund.
  14. Evan Lau & Ahmad Zubaidi Baharumshah & Shazali Abu Mansor & Chin-Hong Puah, 2009. "Testing Stationarity of Budgetary Position in Developing Countries," International Econometric Review (IER), Econometric Research Association, vol. 1(2), pages 77-87, April.
  15. António Afonso & João Tovar Jalles, 2012. "Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries," Working Papers Department of Economics 2012/29, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  16. Adrien Verdelhan & Sophie Garcia, 2001. "Le policy-mix de la zone euro. Une évaluation de l'impact des chocs monétaires et budgétaires," Économie et Prévision, Programme National Persée, vol. 148(2), pages 23-40.
  17. António Afonso, 2005. "Fiscal Sustainability: The Unpleasant European Case," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 19-, March.
  18. Evan Lau & Ahmad Zubaidi Baharumshah, 2005. "Assessing The Mean Reversion Behavior Of Fiscal Policy: The Case Of Asian Countries," Macroeconomics 0504002, EconWPA.

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