Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS
AbstractWe extend previous work on the sustainability of the government's intertemporal budget constraint by allowing for non-linear adjustment of the fiscal variables, conditional on (i) the sign of budgetary disequilibria and (ii) the phase of the economic cycle. Further, our endogenously estimated threshold for the non-linear adjustment is not fixed; instead it is allowed to vary over time and during financial crises. Our analysis presents particular interest within the current economic scenario of financial crises, poor growth and debt crises. Our empirical analysis, applied to the GIPS, shows evidence of a threshold behaviour for the GIPS, that only correct "large" unbalances, which, in the case of Greece and Portugal, are higher than the EGSP criteria. Financial crises further relax the threshold for adjustment: during financial crises, only "very large" budgetary unbalances are corrected.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 54_12.
Date of creation: Jul 2012
Date of revision:
debt sustainability; fiscal adjustment; nonlinear models;
Other versions of this item:
- Gabriella Deborah Legrenzi & Costas Milas, 2012. "Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS," CESifo Working Paper Series 4001, CESifo Group Munich.
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-EEC-2012-07-14 (European Economics)
- NEP-FDG-2012-07-14 (Financial Development & Growth)
- NEP-MAC-2012-07-14 (Macroeconomics)
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.:
- Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
- Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002.
"Smooth Transition Autoregressive Models — A Survey Of Recent Developments,"
Taylor & Francis Journals, vol. 21(1), pages 1-47.
- van Dijk, D.J.C. & Terasvirta, T. & Franses, Ph.H.B.F., 2000. "Smooth transition autoregressive models - A survey of recent developments," Econometric Institute Research Papers EI 2000-23/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
- Carmen M. Reinhart & M. Belen Sbrancia, 2011.
"The Liquidation of Government Debt,"
NBER Working Papers
16893, National Bureau of Economic Research, Inc.
- Bajo-Rubio, Oscar & Diaz-Roldan, Carmen & Esteve, Vicente, 2006.
"Is the budget deficit sustainable when fiscal policy is non-linear? The case of Spain,"
Journal of Macroeconomics,
Elsevier, vol. 28(3), pages 596-608, September.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003. "Is the Budget Deficit Sustainable when Fiscal Policy is nonlinear? The Case of Spain, 1961-2001," Economic Working Papers at Centro de Estudios Andaluces E2003/32, Centro de Estudios Andaluces.
- Alberto Alesina & Allan Drazen, 1989.
"Why are Stabilizations Delayed?,"
NBER Working Papers
3053, National Bureau of Economic Research, Inc.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
- Arghyrou, Michael G. & Luintel, Kul B., 2007.
"Government solvency: Revisiting some EMU countries,"
Journal of Macroeconomics,
Elsevier, vol. 29(2), pages 387-410, June.
- Arghyrou, Michael G & Kul B Luintel, 2003. "Government Solvency: Revisiting some EMU Countries," Royal Economic Society Annual Conference 2003 8, Royal Economic Society.
- Michael G. Arghyrou & Kul B Luintel, 2002. "Government Solvency: Revisiting some EMU Countries," Economics and Finance Discussion Papers 02-24, Economics and Finance Section, School of Social Sciences, Brunel University.
- Michael G. Arghyrou & Kul B Luintel, 2002. "Government Solvency: Revisiting some EMU Countries," Public Policy Discussion Papers 02-24, Economics and Finance Section, School of Social Sciences, Brunel University.
- António Afonso & Christophe Rault, 2010.
"What do we really know about fiscal sustainability in the EU? A panel data diagnostic,"
Review of World Economics (Weltwirtschaftliches Archiv),
Springer, vol. 145(4), pages 731-755, January.
- Christophe Rault & Antonio Alfonso, 2007. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," William Davidson Institute Working Papers Series wp893, William Davidson Institute at the University of Michigan.
- António Afonso & Christophe Rault, 2007. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," Working Papers hal-00322091, HAL.
- Afonso, António & Rault, Christophe, 2007. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," Working Paper Series 0820, European Central Bank.
- António Afonso & Christophe Rault, 2008. "What do we really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," CESifo Working Paper Series 2226, CESifo Group Munich.
- Vito Polito & Mike Wickens, 2007. "Measuring the Fiscal Stance," Discussion Papers 07/14, Department of Economics, University of York.
- James D. Hamilton & Marjorie A. Flavin, 1985.
"On the Limitations of Government Borrowing: A Framework for Empirical Testing,"
NBER Working Papers
1632, National Bureau of Economic Research, Inc.
- Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-19, September.
- George Kapetanios & Yongcheol Shin & Andy Snell, 2003. "Testing for Cointegration in Nonlinear STAR Error Correction Models," Working Papers 497, Queen Mary, University of London, School of Economics and Finance.
- Bravo, Ana Bela Santos & Silvestre, Antonio Luis, 2002. "Intertemporal sustainability of fiscal policies: some tests for European countries," European Journal of Political Economy, Elsevier, vol. 18(3), pages 517-528, September.
- Mackinnon, J.G. & Haug, A.A. & Michelis, L., 1996.
"Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration,"
96a09, Universite Aix-Marseille III.
- MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
- James G. MacKinnon & Alfred A. Haug & Leo Michelis, 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Working Papers 1996_07, York University, Department of Economics.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Dahl, Christian M. & Gonzalez-Rivera, Gloria, 2003. "Testing for neglected nonlinearity in regression models based on the theory of random fields," Journal of Econometrics, Elsevier, vol. 114(1), pages 141-164, May.
- António Afonso, 2005.
"Fiscal Sustainability: The Unpleasant European Case,"
FinanzArchiv: Public Finance Analysis,
Mohr Siebeck, Tübingen, vol. 61(1), pages 19-, March.
- Antonio Afonso, 2004. "Fiscal Sustainability: the Unpleasant European Case," Money Macro and Finance (MMF) Research Group Conference 2004 57, Money Macro and Finance Research Group.
- Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
- Piergallini, Alessandro, 2012. "Non-Linear Fiscal Regimes and Interest Rate Policy," MPRA Paper 42671, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roberto Patuelli).
If references are entirely missing, you can add them using this form.