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Why Fiscal Regimes Matter for Fiscal Sustainability: An Application to France

Author

Listed:
  • Pierre Aldama

    (Paris School of Economics, Université Paris 1)

  • Jérôme Creel

    (Sciences Po, OFCE, Paris, France and ESCP-Europe)

Abstract

This paper introduces a Regime-Switching Model-Based Sustainability test allowing for periodic (or local) violations of Bohn (1998, QJE)’s sustainability condition. We assume a Markov-switching fiscal policy rule whose parameters stochastically switch between sustainable and unsustainable regimes. We demonstrate that long-run fiscal sustainability not only depends on regime-specific feedback coefficients of the fiscal policy rule but also on the average durations of fiscal regimes. Evidence on French data suggests that both the No-Ponzi Game condition and the Debt-stabilizing condition hold in the long-run, when accounting for fiscal regimes, contrary to standard MBS tests.

Suggested Citation

  • Pierre Aldama & Jérôme Creel, 2017. "Why Fiscal Regimes Matter for Fiscal Sustainability: An Application to France," Working Papers 2017.01, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2017.01
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    References listed on IDEAS

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    Cited by:

    1. Aldama, Pierre & Creel, Jérôme, 2019. "Fiscal policy in the US: Sustainable after all?," Economic Modelling, Elsevier, vol. 81(C), pages 471-479.
    2. Pierre ALDAMA & Jérôme Creel, 2017. "Fiscal policy in the US : Ricardian after all ?," Documents de Travail de l'OFCE 2017-23, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. repec:hal:spmain:info:hdl:2441/4718gto3ar8s3r4k307p0bvbcs is not listed on IDEAS
    4. repec:hal:spmain:info:hdl:2441/7suq9gqkp186e8d6eou29dipgk is not listed on IDEAS
    5. Anna Staszewska-Bystrova & Victor Bystrov, 2022. "The Evolution of Fiscal Policy and Public Debt Dynamics: The Case of Sweden," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 67-83.

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    More about this item

    Keywords

    Fiscal rules; Fiscal regimes; Public debt sustainability; Time-varying parameters; Markov- switching models;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • H - Public Economics

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