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Interpretation and limits of sustainability tests in public finance
[Interprétation et limites des tests de soutenabilité des finances publiques]

Author

Listed:
  • Gildas Lamé

    (INSEE - Institut national de la statistique et des études économiques (INSEE))

  • Matthieu Lequien

    (INSEE - Institut national de la statistique et des études économiques (INSEE))

  • Pierre-Alain Pionnier

    (INSEE - Institut national de la statistique et des études économiques (INSEE))

Abstract

Public debt is considered sustainable if discounted net repayments are expected to cover the initial debt issuance, i.e. if the government intertemporal budget constraint is expected to hold. With risk averse lenders and an uncertain economic environment, Bohn (1995) stresses that this constraint relies on a stochastic discount factor which depends on lenders' preferences. To get round the difficulty related to the specification of private agents' preferences in empirical analysis, Bohn (1998) suggests to estimate fiscal reaction functions describing how primary surplus reacts to indebtedness. After having solved the econometric issues arising when primary surplus and debt have a very different persistence (with a nonparametric approach) or are both integrated (with parametric tests), we estimate fiscal reaction functions for France and for Greece. The empirical results highlight the remaining limitations and interpretation difficulties that plague these econometric sustainability tests.

Suggested Citation

  • Gildas Lamé & Matthieu Lequien & Pierre-Alain Pionnier, 2013. "Interpretation and limits of sustainability tests in public finance [Interprétation et limites des tests de soutenabilité des finances publiques]," Working Papers hal-05462904, HAL.
    • Handle: RePEc:hal:wpaper:hal-05462904
    Note: View the original document on HAL open archive server: https://insee.hal.science/hal-05462904v1
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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