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Fiscal reaction functions for the advanced economies revisited

Author

Listed:
  • Francesca Di Iorio

    (Università di Napoli Federico II)

  • Stefano Fachin

    (“Sapienza” Università di Roma)

Abstract

We revisit the relationship between the primary balances/GDP and debt/GDP ratios (fiscal reaction function, FRF), in the advanced economies, showing that using adequate tests and estimators leads to question the validity of the current consensus. Using data for 1961–2019, we find that long-run FRFs exist only in a small number of advanced economies (Belgium, Germany, Greece, Norway, Portugal and Sweden), with polynomial effects with fiscal fatigue only in Germany. These results warn against the widespread practice of estimating homogeneous polynomial panel FRFs. Limiting the sample to 1961–2007, thus excluding the 2008 crisis and its aftermath, FRFs hold also in Canada, Ireland, Italy (polynomial), Spain and USA, though not in Germany, and the coefficients are generally larger. Particularly, after 2008 European Union countries appear somehow to have been more likely to implement FRFs.

Suggested Citation

  • Francesca Di Iorio & Stefano Fachin, 2022. "Fiscal reaction functions for the advanced economies revisited," Empirical Economics, Springer, vol. 62(6), pages 2865-2891, June.
    • Handle: RePEc:spr:empeco:v:62:y:2022:i:6:d:10.1007_s00181-021-02119-y
    DOI: 10.1007/s00181-021-02119-y
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    Cited by:

    1. António Afonso & José Alves & José Carlos Coelho, 2023. "Determinants of the degree of fiscal sustainability," Working Papers REM 2023/0255, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    More about this item

    Keywords

    Public debt; Fiscal reaction function; Fiscal sustainability; Panel cointegration; Cointegrating polynomial regression; OECD;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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