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On the estimation of panel fiscal reaction functions: Heterogeneity or fiscal fatigue?

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  • Everaert, Gerdie
  • Jansen, Stijn

Abstract

This paper investigates whether fiscal fatigue is a robust characteristic of the fiscal reaction function in a panel of OECD countries over the period 1970–2014 or merely an artifact of ignoring important aspects of the panel dimension of the data. More specifically, we test whether the quadratic and cubic debt-to-GDP terms remain significant once a country-specific reaction of the primary balance to lagged debt is allowed for. The results show a significant heterogeneous reaction of the primary balance to lagged debt with fiscal fatigue not being a general characteristic of the fiscal reaction function shared by all countries in our panel. In line with the literature, we further find that fiscal balances tend to deteriorate in contractions without correspondingly improving during expansions.

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  • Everaert, Gerdie & Jansen, Stijn, 2018. "On the estimation of panel fiscal reaction functions: Heterogeneity or fiscal fatigue?," Economic Modelling, Elsevier, vol. 70(C), pages 87-96.
  • Handle: RePEc:eee:ecmode:v:70:y:2018:i:c:p:87-96
    DOI: 10.1016/j.econmod.2017.10.014
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    More about this item

    Keywords

    Fiscal reaction function; Fiscal fatigue; Non-linearities; Heterogeneity; Dynamics;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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