IDEAS home Printed from
   My bibliography  Save this paper

Enrichments to Multi-Year Fiscal Commitments in the Presence of Uncertainty


  • Patrick Georges
  • Nicolas Moreau


Firstly, the study illustrates in a stochastic simulation model that permanent commitments to tax and spending measures can be enriched significantly without substantially raising the risk of a deficit outcome. This result is obtained in a framework where the fiscal authority is able to monitor the origin of the economic shocks and has model-consistent expectations. Secondly, this paper evaluates whether the knowledge of the origin and persistence of the economic shocks is a key element driving this conclusion. To do this, we add to the economic uncertainty, uncertainty about the "true" persistence of the shocks and gauge whether, in that context dubbed "model uncertainty", our strategy can still enhance the fiscal authority’s pre-commitment to permanent measures without substantially increasing the risk of a deficit outcome. We conclude that, as time goes on, the fiscal authority may find that it has been too optimistic in enhancing its permanent commitments (i.e., these additional permanent fiscal measures may increase the probability of a deficit outcome). This illustrates the difficulties of making decisions under uncertainty and the potential cost of making mistakes. This also suggests the importance of prudent behavior when committing to long-term fiscal initiatives. Our conclusion, however, depends on the way the total uncertainty facing the fiscal authority is controlled, and on other factors such as the calibration of our model and the ability of learning of the fiscal authority. Model uncertainty may well have less effect at medium-term horizons when these considerations are introduced. Dans un premier temps nous montrons dans un modèle de simulation stochastique que si l’autorité budgétaire est capable d’observer l’origine des chocs économiques et a des attentes consistantes avec le modèle, des mesures budgétaires permanentes et substantielles peuvent alors être introduites sans créer une augmentation importante du risque de déficit budgétaire. Ensuite, afin d’évaluer si ce résultat est sensible à la connaissance de l’origine et de la persistance des chocs, nous ajoutons à l’incertitude économique l’incertitude quant à la "vraie" persistance des chocs et estimons si, dans ce contexte appelé «incertitude de modèle», il est toujours possible d’enrichir les engagements permanents sans augmenter substantiellement le risque de déficit budgétaire. Nous concluons que l’autorité budgétaire peut, dans le moyen terme, se rendre compte qu’elle a sur-réagit dans ses enrichissements d’engagements permanents, c’est-à-dire, que ces enrichissements sont accompagnés d’une hausse de la probabilité de déficit budgétaire. Ceci illustre les difficultés de la prise de décision dans un contexte d’incertitude, le coût potentiel de faire des erreurs, et l’importance d’un comportement prudent face aux engagements permanents. Nos conclusions dépendent du contrôle du contexte d’incertitude totale dans lequel l’autorité budgétaire opère, et d’autres facteurs comme le calibrage du modèle et la capacité d’apprentissage de l’autorité budgétaire. La sur-réaction dans les enrichissements d’engagements permanents peut être réduite lorsque ces considérations sont prises en compte.

Suggested Citation

  • Patrick Georges & Nicolas Moreau, "undated". "Enrichments to Multi-Year Fiscal Commitments in the Presence of Uncertainty," Working Papers-Department of Finance Canada 2002-11, Department of Finance Canada.
  • Handle: RePEc:fca:wpfnca:2002-11

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Philippe D Karam & Douglas Hostland, 2005. "Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods," IMF Working Papers 05/226, International Monetary Fund.
    2. Doug Hostland, "undated". "Fiscal Planning in an Era of Economic Stability," Working Papers-Department of Finance Canada 2003-10, Department of Finance Canada.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:fca:wpfnca:2002-11. 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: (Gustavo Durango). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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.

    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.