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Fiscal Shocks and Fiscal Risk Management

We use the returns on a set of international financial securities to identify exogenous shocks to the Canadian federal surplus. We find that a large portion of the variation in the surplus can be replicated by a linear combination of these returns and that the rising debt observed in the 1980s and 1990s was a result of adverse exogenous shocks and a delayed response by the government to these shocks. We develop a formal framework to evaluate the potential gains from a fiscal risk management strategy, using these securities to hedge against exogenous shocks. We show that fiscal risk management can generate significant welfare gains by enhancing the sustainability of fiscal policy and thereby lowering average tax rates. Nous utilisons les rendements de plusieurs actifs financiers internationaux pour identifier les chocs exogènes au surplus fédéral canadien. Nous trouvons qu'une grande proportion de la variation du surplus peut être répliquée par une combinaison linéaire de ces rendements et que la dette croissante observée durant les années 1980 et 1990 était le résultat de chocs exogènes négatifs et d'une réponse retardée du gouvernement face à ces chocs. Nous développons un cadre formel permettant d'évaluer les gains potentiels provenant d'une stratégie de gestion du risque fiscal utilisant ces actifs pour se couvrir contre des chocs exogènes. Nous montrons que la gestion du risque fiscal peut générer des gains en bien-être significatifs en améliorant la soutenabilité de la politique fiscale et ainsi en réduisant les taux d'imposition moyens.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 108.

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Length: 35 pages
Date of creation: Mar 2000
Date of revision:
Handle: RePEc:cre:crefwp:108
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  13. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
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  15. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
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