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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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  1. 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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  3. Bohn, H., 1990. "The Substainability Of Budget Deficits With Lump-Sum And With Income-Based Taxation," Weiss Center Working Papers 17-90, Wharton School - Weiss Center for International Financial Research.
  4. John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc.
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  8. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  9. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  10. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 1-90, Wharton School Rodney L. White Center for Financial Research.
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  12. Guido Tabellini, 1989. "The Politics of Intergenerational Redistribution," NBER Working Papers 3058, National Bureau of Economic Research, Inc.
  13. von Hagen,Juergen, . "A note on the empirical effectiveness of formal fiscal restraints," Discussion Paper Serie B 155, University of Bonn, Germany.
  14. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
  15. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
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  19. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  20. Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
  21. Boothe, Paul & Reid, Bradford, 1992. "Debt Management Objectives for a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 43-60, February.
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  23. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
  24. Henning Bohn & Robert P. Inman, . "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (Reprint 060)," Rodney L. White Center for Financial Research Working Papers 10-96, Wharton School Rodney L. White Center for Financial Research.
  25. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
  26. Persson, Torsten & Svensson, Lars E O, 1989. "Why a Stubborn Conservative Would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 325-45, May.
  27. Zhu, Xiaodong, 1995. "Endogenous capital utilization, investor's effort, and optimal fiscal policy," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 655-677, December.
  28. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
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