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Signaling Fiscal Regime Sustainability

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  • Drudi, F.
  • Prati, A.

Abstract

This paper proposes a signaling model of fiscal stabilizations that offers a new perspective on why governments deviate from optimal tax smoothing. In our model, dependable -but not fully credible- governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock debt has been accumulated). At this point, they may deviate from tax smoothing in order to avoid being mimicked by weak governments. We show that a testable prediction of our model is that primary balances and debt stocks are complementary inputs in the credit rating function and we sucessfully test it on Irish , Belgian, and Danish data from the late 1970s to the early 1990s.

Suggested Citation

  • Drudi, F. & Prati, A., 1998. "Signaling Fiscal Regime Sustainability," Papers 335, Banca Italia - Servizio di Studi.
  • Handle: RePEc:fth:banita:335
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    References listed on IDEAS

    as
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    Cited by:

    1. Byrne, Joseph P. & Fiess, Norbert & MacDonald, Ronald, 2011. "The global dimension to fiscal sustainability," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 137-150, June.
    2. Santiago HERRERA & Fernando BLANCO, 2010. "The Quality of Brazilian Fiscal Adjustment, 1999 - 2001," EcoMod2004 330600066, EcoMod.
    3. Rancière, Romain & Catão, Luís & Fostel, Ana, 2013. "Fiscal Discoveries and Sudden Decouplings," CEPR Discussion Papers 9368, C.E.P.R. Discussion Papers.
    4. Stefano Castriota & Marco Delmastro, 2010. "Individual and Collective Reputation: Lessons from the Wine Market," L'industria, Società editrice il Mulino, issue 1, pages 149-172.
    5. Andrew K. Rose & Mark M. Spiegel, 2009. "Noneconomic Engagement and International Exchange: The Case of Environmental Treaties," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2‐3), pages 337-363, March.
    6. Silvia Marchesi, 2006. "Buybacks of domestic debt in public debt management," The European Journal of Finance, Taylor & Francis Journals, vol. 12(5), pages 379-400.
    7. Luis Catão & Ana Fostel & Romain Ranciere, 2017. "Fiscal Discoveries and Yield Decouplings," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(4), pages 704-744, November.
    8. Drudi, Francesco & Prati, Alessandro, 2000. "Signaling fiscal regime sustainability," European Economic Review, Elsevier, vol. 44(10), pages 1897-1930, December.
    9. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    10. Herrera, Santiago & Youssef, Hoda & Youssef, Hoda & Zaki, Chahir, 2010. "Egypt beyond the crisis : medium-term challenges for sustained growth," Policy Research Working Paper Series 5451, The World Bank.
    11. Anna Gibert, 2016. "The Signaling Role of Fiscal Austerity," Discussion Papers of DIW Berlin 1623, DIW Berlin, German Institute for Economic Research.
    12. World Bank, 2004. "Grenada, OECS Fiscal Issues : Policies to Achieve Fiscal Sustainability and Improve Efficiency and Equity of Public Expenditures," World Bank Publications - Reports 13939, The World Bank Group.
    13. Drudi, Francesco & Giordano, Raffaela, 2000. "Default risk and optimal debt management," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 861-891, June.
    14. Benigno, Pierpaolo & Missale, Alessandro, 2004. "High public debt in currency crises: fundamentals versus signaling effects," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 165-188, March.
    15. Fiess, Norbert, 2003. "Capital flows, country risk, and contagion," Policy Research Working Paper Series 2943, The World Bank.
    16. Siviero, S. & Terlizzese, D. & Visco, I., 1999. "Are Model-Based Inflation Forecasts Used in Monetary Policymaking? A Case Study," Papers 357, Banca Italia - Servizio di Studi.
    17. Gibert, Anna, 2022. "Signalling creditworthiness with fiscal austerity," European Economic Review, Elsevier, vol. 144(C).

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    More about this item

    Keywords

    FISCAL POLICY ; TAX POLICY ; GOVERNMENT POLICY;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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