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Dealing with Unexpected Shocks to the Budget

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  • Elena Gennari
  • Raffaela Giordano
  • Sandro Momigliano

Abstract

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.

Suggested Citation

  • Elena Gennari & Raffaela Giordano & Sandro Momigliano, 2005. "Dealing with Unexpected Shocks to the Budget," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(2), pages 201-219, July.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200507)61:2_201:dwustt_2.0.tx_2-e
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    Cited by:

    1. Gerhard Kempkes, 2014. "Cyclical Adjustment in Fiscal Rules: Some Evidence on Real-Time Bias for EU-15 Countries," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(2), pages 278-315, June.
    2. Kempkes, Gerhard, 2012. "Cyclical adjustment in fiscal rules: Some evidence on real-time bias for EU-15 countries," Discussion Papers 15/2012, Deutsche Bundesbank.

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    More about this item

    Keywords

    budgeting; stability and growth pact; forecast errors;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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