Modelling the Fiscal Reaction Functions of the GIPS based on State-Varying Thresholds
We extend previous literature on fiscal policy sustainability by introducing non-linear fiscal reaction functions with endogenously estimated state-varying thresholds to capture the behaviour of fiscal policy authorities during â€œgoodâ€ and â€œbadâ€ times. These thresholds vary with the level of debt, the economic cycle and an index of financial pressure.
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