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A model-based indicator of the fiscal stance

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  • Polito, Vito
  • Wickens, Mike

Abstract

We argue that the conventional approach to assessing the fiscal stance based on econometric tests of the government present value budget constraint (PVBC) is of limited practical use. We propose an alternative measure that focuses on short-run fluctuations in the fiscal stance, namely, a model-based indicator that compares a target level of the debt-GDP ratio at a given point in the future with a forecast based on the government budget constraint (GBC) where the forecasts are obtained using a recursively estimated VAR. By log-linearising the GBC the index can be decomposed into the various different components of which it is comprised. Using data from 1970 to 2011 we conduct a detailed time-series study of the fiscal stances of four countries: the United States, the United Kingdom, Germany and Greece and we calculate the index for 11 other EU countries. For most countries the index shows that their fiscal stances vary from being too loose to too tight. Almost without exception the index drops sharply from 2007 showing the harmful effect on their fiscal stances of the recent recession.

Suggested Citation

  • Polito, Vito & Wickens, Mike, 2012. "A model-based indicator of the fiscal stance," European Economic Review, Elsevier, vol. 56(3), pages 526-551.
  • Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:526-551
    DOI: 10.1016/j.euroecorev.2011.12.003
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    6. Jasper Lukkezen & Hugo Rojas-Romagosa, 2012. "When is debt sustainable?," CPB Discussion Paper 212, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Gómez-Puig, Marta & Sosvilla-Rivero, Simón & Ramos-Herrera, María del Carmen, 2014. "An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 133-153.
    8. Motohiro Sato, 2018. "Comment on “Is Abe's Fiscal Policy Ricardian? What Does the Fiscal Theory of Prices Mean for Japan?â€," Asian Economic Policy Review, Japan Center for Economic Research, vol. 13(1), pages 66-67, January.
    9. Michael Wickens, 2016. "The eurozone financial crisis: debt, credit ratings and monetary and fiscal policy," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 219-233, May.
    10. Polito, Vito & Wickens, Mike, 2014. "Modelling the U.S. sovereign credit rating," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 202-218.
    11. Takero Doi, 2018. "Is Abe's Fiscal Policy Ricardian? What Does the Fiscal Theory of Prices Mean for Japan?," Asian Economic Policy Review, Japan Center for Economic Research, vol. 13(1), pages 46-63, January.
    12. Singh, Manish K. & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2021. "Quantifying sovereign risk in the euro area," Economic Modelling, Elsevier, vol. 95(C), pages 76-96.
    13. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2016. "Causes and hazards of the euro area sovereign debt crisis: Pure and fundamentals-based contagion," Economic Modelling, Elsevier, vol. 56(C), pages 133-147.
    14. Hyejin Ko, 2020. "Measuring fiscal sustainability in the welfare state: fiscal space as fiscal sustainability," International Economics and Economic Policy, Springer, vol. 17(2), pages 531-554, May.
    15. Javier Andrés & Javier J. Pérez & Juan A. Rojas, 2017. "Implicit public debt thresholds: an empirical exercise for the case of Spain," Working Papers 1701, Banco de España.
    16. Hui, Hon Chung, 2013. "Fiscal sustainability in Malaysia: a re-examination," MPRA Paper 80018, University Library of Munich, Germany.
    17. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "EMU sovereign debt market crisis: Fundamentals-based or pure contagion?," Working Papers 14-08, Asociación Española de Economía y Finanzas Internacionales.
    18. Singh, Manish K. & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "Bank risk behavior and connectedness in EMU countries," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 161-184.
    19. Sheng, Xuguang Simon & Sukaj, Rubena, 2021. "Identifying external debt shocks in low- and middle-income countries," Journal of International Money and Finance, Elsevier, vol. 110(C).
    20. Marta Gómez-Puig & Simón Sosvilla-Rivero & Manish K. Singh, 2018. "“Incorporating creditors' seniority into contingent claim models:Application to peripheral euro area countries”," IREA Working Papers 201803, University of Barcelona, Research Institute of Applied Economics, revised Feb 2018.
    21. Ko, Jun-Hyung & Morita, Hiroshi, 2015. "Fiscal sustainability and regime shifts in Japan," Economic Modelling, Elsevier, vol. 46(C), pages 364-375.
    22. Martin Guzman & Domenico Lombardi, 2018. "Assessing the Appropriate Size of Relief in Sovereign Debt Restructuring," Documentos de trabajo del Instituto Interdisciplinario de Economía Política (IIEP-BAIRES) 2018-26, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política (IIEP-BAIRES).
    23. Canofari, Paolo & Marini, Giancarlo & Piergallini, Alessandro, 2020. "Financial Crisis and Sustainability of US Fiscal Deficit: Indicators or Tests?," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 192-204.

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    More about this item

    Keywords

    Budget deficits; Government debt; Fiscal sustainability; VAR analysis; Economic policy;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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