Stochastic debt simulation using VAR models and a panel fiscal reaction function – results for a selected number of countries
AbstractThis study uses vector auto-regression (VAR) models and a panel fiscal reaction function (FRF) to simulate debt ratios for fifteen EU Member States according to four regimes which are the product of the type of errors (normal or bootstrapped) with the assumption on the structural primary balance (unchanged or determined by a panel FRF). This methodology should be used to make probabilistic assessments on the debt ratio rather than for providing point estimates. Results suggest that debt ratio paths are not normally distributed being positively skewed, and; primary balances show "fiscal fatigue" and partial mean reversion to historical trends. Debt sustainability scenarios should also be run using a FRF or some equivalent "mean reversion" hypothesis.
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Bibliographic InfoPaper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 459.
Length: 33 pages
Date of creation: Jul 2012
Date of revision:
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Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-29 (All new papers)
- NEP-CMP-2012-07-29 (Computational Economics)
- NEP-ORE-2012-07-29 (Operations Research)
- NEP-RMG-2012-07-29 (Risk Management)
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