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Interpretation and limits of sustainability tests in public finance

Author

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  • G. LAMÉ

    (Insee)

  • M. LEQUIEN

    (Insee)

  • P.-A. PIONNIER

    (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 non-parametric 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

  • G. Lamé & M. Lequien & P.-A. Pionnier, 2013. "Interpretation and limits of sustainability tests in public finance," Documents de Travail de l'Insee - INSEE Working Papers g2013-05, Institut National de la Statistique et des Etudes Economiques.
    • Handle: RePEc:nse:doctra:g2013-05
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    1. repec:hal:spmain:info:hdl:2441/8g1v863ou8ne8avs9kr75pav8 is not listed on IDEAS
    2. Magazzino, Cosimo & Brady, Gordon L. & Forte, Francesco, 2019. "A panel data analysis of the fiscal sustainability of G-7 countries," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    3. Andric, Vladimir & Arsic, Milojko & Nojkovic, Aleksandra, 2016. "Fiscal Pressure of Interest Payments in Serbia - a Time Series Exploration," EconStor Preprints 141322, ZBW - Leibniz Information Centre for Economics.
    4. Pierre Aldama & Jérôme Creel, 2016. "Why fiscal regimes matter for fiscal sustainability analysis: an application to France," SciencePo Working papers Main hal-03459336, HAL.
    5. Samia Omrane Belguith & Foued Badr Gabsi, 2019. "Public Debt Sustainability in Tunisia: Empirical Evidence Estimating Time-Varying Parameters," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(2), pages 550-560, June.

    More about this item

    Keywords

    Intertemporal budget constraint; unit-roots; cointegration; fiscal reaction function; non-parametric tests;
    All these keywords.

    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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