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Fiscal Shocks and Fiscal Risk Management

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  • Huw Lloyd-Ellis

    ()
    (University of Toronto and CREFE)

  • Xiaodong Zhu

    ()
    (University of Toronto)

Abstract

We use the returns on a set of international financial securities to identify exogenous shocks to the Canadian federal surplus. We find that a large portion of the variation in the surplus can be replicated by a linear combination of these returns and that the rising debt observed in the 1980s and 1990s was a result of adverse exogenous shocks and a delayed response by the government to these shocks. We develop a formal framework to evaluate the potential gains from a fiscal risk management strategy, using these securities to hedge against exogenous shocks. We show that fiscal risk management can generate significant welfare gains by enhancing the sustainability of fiscal policy and thereby lowering average tax rates. Nous utilisons les rendements de plusieurs actifs financiers internationaux pour identifier les chocs exogènes au surplus fédéral canadien. Nous trouvons qu'une grande proportion de la variation du surplus peut être répliquée par une combinaison linéaire de ces rendements et que la dette croissante observée durant les années 1980 et 1990 était le résultat de chocs exogènes négatifs et d'une réponse retardée du gouvernement face à ces chocs. Nous développons un cadre formel permettant d'évaluer les gains potentiels provenant d'une stratégie de gestion du risque fiscal utilisant ces actifs pour se couvrir contre des chocs exogènes. Nous montrons que la gestion du risque fiscal peut générer des gains en bien-être significatifs en améliorant la soutenabilité de la politique fiscale et ainsi en réduisant les taux d'imposition moyens.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 108.

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Length: 35 pages
Date of creation: Mar 2000
Date of revision:
Handle: RePEc:cre:crefwp:108

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Keywords: Fiscal policy; sustainability; asset pricing; risk management;

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Cited by:
  1. P. R. Lane, 2001. "The National Pensions Reserve Fund: Pitfalls and Opportunities," Trinity Economics Papers, Trinity College Dublin, Department of Economics 20017, Trinity College Dublin, Department of Economics.
  2. Marcet, Albert & Scott, Andrew, 2009. "Debt and deficit fluctuations and the structure of bond markets," Journal of Economic Theory, Elsevier, vol. 144(2), pages 473-501, March.
  3. repec:wlu:lcerpa:wm0070 is not listed on IDEAS
  4. Lloyd-Ellis, Huw & Zhan, Shiqiang & Zhu, Xiaodong, 2005. "Tax Smoothing with Stochastic Interest Rates: A Reassessment of Clinton's Fiscal Legacy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(4), pages 699-724, August.
  5. Christos Shiamptanis, 2014. "Risk Assessment Under A Nonlinear Fiscal Policy Rule," LCERPA Working Papers lm0063, Laurier Centre for Economic Research and Policy Analysis, revised Jun 2014.
  6. Melecky, Martin, 2012. "Formulation of public debt management strategies: An empirical study of possible drivers," Economic Systems, Elsevier, vol. 36(2), pages 218-234.
  7. Huw Lloyd-Ellis & Xiaodong Zhu, 2004. "Using Financial Market Information to Enhance Canadian Fiscal Policy," Working Papers 1041, Queen's University, Department of Economics.

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