IDEAS home Printed from https://ideas.repec.org/a/wun/journl/tjev04y2011i3(15)a07.html
   My bibliography  Save this article

A Retrospective Approach on Assessing Fiscal Vulnerability: Empirical Evidence for Overindebted European Countries

Author

Listed:
  • Andreea STOIAN

    (Bucharest Academy of Economic Studies, Department of Finance, Bucharest, Romania)

Abstract

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.

Suggested Citation

  • Andreea STOIAN, 2011. "A Retrospective Approach on Assessing Fiscal Vulnerability: Empirical Evidence for Overindebted European Countries," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 4(3(15)), pages 183-188.
  • Handle: RePEc:wun:journl:tje:v04:y2011:i3(15):a07
    as

    Download full text from publisher

    File URL: https://tje.uvt.ro/index.php/tje/article/download/118/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Alberto Alesina, 2000. "The Political Economy of the Budget Surplus in the United States," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 3-19, Summer.
    2. Afonso, António & Agnello, Luca & Furceri, Davide & Sousa, Ricardo M., 2011. "Assessing long-term fiscal developments: A new approach," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 130-146, February.
    3. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "A Decade of Debt," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 4, pages 97-135, Central Bank of Chile.
    5. António Afonso & Christophe Rault, 2008. "3-Step Analysis of Public Finances Sustainability: the Case of the European Union," Working Papers hal-00322086, HAL.
    6. Claeys, Peter, 2007. "Sustainability of EU Fiscal Policies: a Panel Test," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 22, pages 112-127.
    7. Corsetti, Giancarlo & Roubini, Nouriel, 1996. "European versus American Perspectives on Balanced-Budget Rules," American Economic Review, American Economic Association, vol. 86(2), pages 408-413, May.
    8. Alessio Ciarlone & Giorgio Trebeschi, 2006. "A Multinomial Approach to Early Warning Systems for Debt Crises," Temi di discussione (Economic working papers) 588, Bank of Italy, Economic Research and International Relations Area.
    9. Issouf Samaké & Mr. Evan C Tanner, 2006. "Probabilistic Sustainability of Public Debt: A Vector Autoregression Approach for Brazil, Mexico, and Turkey," IMF Working Papers 2006/295, International Monetary Fund.
    10. Ms. Enrica Detragiache & Mr. Antonio Spilimbergo, 2001. "Crises and Liquidity: Evidence and Interpretation," IMF Working Papers 2001/002, International Monetary Fund.
    11. Mr. Robert C York & Zaijin Zhan, 2009. "Fiscal Vulnerability and Sustainability in Oil-Producing Sub-Saharan African Countries," IMF Working Papers 2009/174, International Monetary Fund.
    12. Murray Petrie & Mr. Richard Hemming, 2000. "A Framework for Assessing Fiscal Vulnerability," IMF Working Papers 2000/052, International Monetary Fund.
    13. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers Department of Economics 2000/12, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    14. Alberto Alesina, 2000. "The Political Economy of the Budget Surplus in the U.S," NBER Working Papers 7496, National Bureau of Economic Research, Inc.
    15. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andreea Stoian & Laura Obreja Brașoveanu & Iulian Viorel Brașoveanu & Bogdan Dumitrescu, 2018. "A Framework to Assess Fiscal Vulnerability: Empirical Evidence for European Union Countries," Sustainability, MDPI, Open Access Journal, vol. 10(7), pages 1-20, July.
    2. Stoian, Andreea & Obreja Brasoveanu, Laura & Dumitrescu, Bogdan & Brasoveanu, Iulian, 2015. "A new framework for detecting the short term fiscal vulnerability for the European Union countries," MPRA Paper 63537, University Library of Munich, Germany.
    3. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, Open Access Journal, vol. 12(24), pages 1-20, December.
    4. Iva Petrova & Nazim Belhocine & Miss Gabriela Dobrescu & Mr. Emanuele Baldacci, 2011. "Assessing Fiscal Stress," IMF Working Papers 2011/100, International Monetary Fund.
    5. Stoian, Andreea & Alves, Rui Henrique, 2014. "High public debt in the euro area: still a fact," MPRA Paper 63679, University Library of Munich, Germany.
    6. Andreea Stoian & Filip Iorgulescu, 2016. "The study of public debt: which are the distinctions between the emerging and advanced economies in the European Union?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(1), pages 167-196, February.
    7. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2018. "International Reserves and Rollover Risk," American Economic Review, American Economic Association, vol. 108(9), pages 2629-2670, September.
    8. repec:imf:imfops:218 is not listed on IDEAS
    9. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    10. Emilia Câmpeanu & Andreea Stoian, 2010. "Fiscal Policy Reaction in the Short Term for Assessing Fiscal Sustainability in the Long Runin Central and Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 501-518, December.
    11. Stoian, Andreea, 2012. "Fiscal Sustainability of the European Welfare State: Evidence from Cumulative Excess of the Primary Balance," Working Papers 27/2012, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
    12. Haffert, Lukas, 2016. "Permanent budget surpluses as a fiscal regime," MPIfG Discussion Paper 16/1, Max Planck Institute for the Study of Societies.
    13. Frantisek Hajnovic & Juraj Zeman, 2012. "Fiscal Space in the Euro zone," Working and Discussion Papers WP 5/2012, Research Department, National Bank of Slovakia.
    14. Ureche-Rangau, Loredana & Burietz, Aurore, 2013. "One crisis, two crises…the subprime crisis and the European sovereign debt problems," Economic Modelling, Elsevier, vol. 35(C), pages 35-44.
    15. Magazzino, Cosimo & Brady, Gordon L. & Forte, Francesco, 2019. "A panel data analysis of the fiscal sustainability of G-7 countries," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    16. Gábor Kutasi, 2017. "Unsustainable Public Debt in a European Fiscal Union?," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 9(1), pages 25-39, February.
    17. Mr. Philippe Wingender & Francesca G Caselli, 2018. "Bunching at 3 Percent: The Maastricht Fiscal Criterion and Government Deficits," IMF Working Papers 2018/182, International Monetary Fund.
    18. Stoian, Andreea & Obreja Brasoveanu, Laura & Dumitrescu, Bogdan & Brasoveanu, Iulian, 2015. "Empirical study on the determinants of fiscal vulnerability: evidence for the European Union," MPRA Paper 65063, University Library of Munich, Germany.
    19. Buckle, Robert A., 2018. "A quarter of a century of fiscal responsibility: The origins and evolution of fiscal policy governance and institutional arrangements in New Zealand, 1994 to 2018," Working Paper Series 7693, Victoria University of Wellington, Chair in Public Finance.
    20. David Cronin, 2020. "Are Member States’ Budgetary Policies Adhering to the EU Fiscal Rules?," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 66(1), pages 47-64.
    21. Eberhardt, Markus & Presbitero, Andrea F., 2015. "Public debt and growth: Heterogeneity and non-linearity," Journal of International Economics, Elsevier, vol. 97(1), pages 45-58.

    More about this item

    Keywords

    Fiscal policy; fiscal sustainability; primary balance; public debt;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wun:journl:tje:v04:y2011:i3(15):a07. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/feuvtro.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Romeo Margea (email available below). General contact details of provider: https://edirc.repec.org/data/feuvtro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.