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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
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Handle: RePEc:cpm:cepmap:9815

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  1. Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 21(3), pages 291-306, August.
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Cited by:
  1. António Afonso & João Tovar Jalles, 2012. "Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2012/29, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  2. Antonio Afonso, 2004. "Fiscal Sustainability: the Unpleasant European Case," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 57, Money Macro and Finance Research Group.
  3. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2000/12, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. 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, University of Pretoria, Department of Economics 201023, University of Pretoria, Department of Economics.
  5. Priesmeier, Christoph & Koester, Gerrit B., 2012. "Does Wagner's law ruin the sustainability of German public finances?," Discussion Papers, Deutsche Bundesbank, Research Centre 08/2012, Deutsche Bundesbank, Research Centre.
  6. 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, Programme National Persée, vol. 148(2), pages 23-40.
  7. Massimo Antonini & Kevin Lee & Jacinta Pires, . "Public Sector Debt Dynamics: The Persistence and Sources of Shocks to Debt in Ten EU Countries," Discussion Papers, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) 11/08, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  8. Ahmad Zubaidi Baharumshah & Evan Lau, 2005. "Regime Changes And The Sustainability Of Fiscal Imbalance In East Asian Countries," Macroeconomics, EconWPA 0504001, EconWPA.
  9. 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, Institut National de la Statistique et des Etudes Economiques, DESE g2004-10, Institut National de la Statistique et des Etudes Economiques, DESE.
  10. António Afonso & João Tovar Jalles, 2011. "A Longer-run Perspective on Fiscal Sustainability," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2011/17, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  11. Chen, Shyh-Wei, 2014. "Testing for fiscal sustainability: New evidence from the G-7 and some European countries," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 1-15.
  12. Gabriella Deborah Legrenzi & Costas Milas, 2010. "Spend-and-Tax Adjustments and the Sustainability of the Government's Intertemporal Budget Constraint," CESifo Working Paper Series, CESifo Group Munich 2926, CESifo Group Munich.
  13. 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, Econometric Research Association, vol. 1(2), pages 77-87, April.
  14. Wolfgang Kitterer, 2007. "Nachhaltige Finanz- und Investitionspolitik der Bundesländer," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, Verein für Socialpolitik, vol. 8(s1), pages 53-83, 04.
  15. Georgios Chortareas & George Kapetanios & Merih Uctum, 2003. "A Nonlinear Approach to Public Finance Sustainability in Latin America," Working Papers, Queen Mary, University of London, School of Economics and Finance 486, Queen Mary, University of London, School of Economics and Finance.
  16. Evan Tanner & Issouf Samaké, 2006. "Probabilistic Sustainability of Public Debt," IMF Working Papers, International Monetary Fund 06/295, International Monetary Fund.
  17. António Afonso & Christophe Rault, 2007. "What We Really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2007/20, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  18. Evan Lau & Ahmad Zubaidi Baharumshah, 2005. "Assessing The Mean Reversion Behavior Of Fiscal Policy: The Case Of Asian Countries," Macroeconomics, EconWPA 0504002, EconWPA.

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