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Fiscal Shocks and Fiscal Risk Management

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  • H. Lloyd-Ellis
  • Xiaodong Zhu

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.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-LLOYDELL-98-01.pdf
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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number lloydell-98-01.

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Length: 29 pages
Date of creation: 10 Jul 1998
Date of revision:
Handle: RePEc:tor:tecipa:lloydell-98-01

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Postal: 150 St. George Street, Toronto, Ontario
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Keywords: Fiscal policy; sustainability; asset pricing; risk management.;

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References

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Citations

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Cited by:
  1. 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, vol. 37(4), pages 699-724, August.
  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.
  3. Cristos Shiamptanis, 2014. "Risk Assessment Under A Nonlinear Fiscal Policy Rule," LCERPA Working Papers wm0070, Laurier Centre for Economic Research and Policy Analysis, revised 1970.
  4. P. R. Lane, 2001. "The National Pensions Reserve Fund: Pitfalls and Opportunities," Trinity Economics Papers 20017, Trinity College Dublin, Department of Economics.
  5. Huw Lloyd-Ellis & Xiaodong Zhu, 2004. "Using Financial Market Information to Enhance Canadian Fiscal Policy," Working Papers 1041, Queen's University, Department of Economics.
  6. 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.
  7. Melecky, Martin, 2012. "Formulation of public debt management strategies: An empirical study of possible drivers," Economic Systems, Elsevier, vol. 36(2), pages 218-234.

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