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Dealing with Unexpected Shocks to the Budget

  • Elena Gennari
  • Raffaela Giordano
  • Sandro Momigliano

We assess the impact of unexpected shocks to real interest rates and GDP growth on government budgets for nine European Union countries. Shocks are estimated as onestep-ahead forecast errors arising from a recursive bivariate VAR model. Our analysis is relevant, in particular, to deciding what safety margins are needed to limit the risk of the deficit's exceeding the 3% Maastricht threshold. The approach followed differs in two respects from standard analyses aiming at defining budgetary positions that satisfy the Stability and Growth Pact. First, whereas the latter examine only fluctuations in economic activity, we also consider fluctuations in interest rates. Second, whereas standard analyses focus on deviations from trends and define margins for the mediumterm cyclically adjusted balance, we examine unexpected shocks and define margins for nominal balances. The results point to significant differences in the required margins across countries.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 61 (2005)
Issue (Month): 2 (July)
Pages: 201-

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200507)61:2_201:dwustt_2.0.tx_2-e
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  1. Canova, Fabio, 1998. "Detrending and business cycle facts," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 475-512, May.
  2. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
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  6. Marín, José M., 2002. "Sustainability of public finances and automatic stabilisation under a rule of budgetary discipline," Working Paper Series 0193, European Central Bank.
  7. Buti, Marco & Franco, Daniele & Ongena, Hedwig, 1998. "Fiscal Discipline and Flexibility in EMU: The Implementation of the Stability and Growth Pact," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 81-97, Autumn.
  8. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
  9. Ray Barrell & Ian Hurst & Álvaro Pina, 2002. "Fiscal Targets, Automatic Stabilisers and their Effects on Output," Working Papers Department of Economics 2002/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  10. Thomas Dalsgaard & Alain de Serres, 1999. "Estimating Prudent Budgetary Margins for 11 EU Countries: A Simulated SVAR Model Approach," OECD Economics Department Working Papers 216, OECD Publishing.
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