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Fiscal Shocks and Fiscal Risk Management

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Author Info
Huw Lloyd-Ellis () (University of Toronto and CREFE)
Xiaodong Zhu () (University of Toronto)

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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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Publisher 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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Related research
Keywords: Fiscal policy; sustainability; asset pricing; risk management;

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
F3 - International Economics - - International Finance
H6 - Public Economics - - National Budget, Deficit, and Debt

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  1. Canadian Macro Study Group
References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Huw Lloyd-Ellis & Shiqiang Zhang & Xiaodong Zhu, 2001. "Tax Smoothing with Stochastic Interest Rates: A Re-assessment of Clinton's Fiscal Legacy," Cahiers de recherche CREFE / CREFE Working Papers 125, CREFE, Université du Québec à Montréal. [Downloadable!]
    Other versions:
  2. Albert Marcet & Andrew Scott, 2001. "Debt and Deficit Fluctuations and the Structure of Bond Markets," Economics Working Papers 558, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2003. [Downloadable!]
    Other versions:
  3. Huw Lloyd-Ellis & Xiaodong Zhu, 2004. "Using Financial Market Information to Enhance Canadian Fiscal Policy," Working Papers 1041, Queen's University, Department of Economics. [Downloadable!]
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