A Retrospective Approach on Assessing Fiscal Vulnerability: Empirical Evidence for Overindebted European Countries
Fiscal policy in advanced economies confronted with growing challenges for the last decades, given by the increasing of public debt, ageing population and a pro-cyclical fiscal policy. These went to large deficits and public debt stocks. Consequently, the exposure to liquidity and/or solvency risks increased. In this context, the question of how vulnerable fiscal policy is naturally arises. The aim of this paper is to present a methodology for assessing fiscal vulnerability. The methodology bases on a simple public debt dynamic model with growing economy, increasing public debt and inflation rate that allows the estimation of a required primary balance. Comparing with the current primary balance, one can said that fiscal policy is vulnerable whenever the required primary balance is larger than the current one. The methodology is applied on annual data spanned on 1970-2012 for Belgium, Ireland, Greece, Italy, Hungary, Malta and the Netherlands. The results show that fiscal policy was vulnerable in many of the years from the period under review. Moreover, excepting Belgium and Italy, for the rest of the countries, fiscal vulnerability occurred mostly after the Maastricht Treaty was enforced. Consequently, the constraint imposed to limit the public debt to 60% of GDP does not necessarily imply a sound fiscal policy.
Volume (Year): 4 (2011)
Issue (Month): 3(15) ()
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