IDEAS home Printed from https://ideas.repec.org/p/spo/wpmain/infohdl2441-8g1v863ou8ne8avs9kr75pav8.html
   My bibliography  Save this paper

Why fiscal regimes matter for fiscal sustainability analysis: an application to France

Author

Listed:
  • Pierre Aldama

    (Université de Paris-1, PSE)

  • Jérôme Creel

    (Observatoire français des conjonctures économiques)

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 the No-Ponzi game condition weakly holds in the long run, when accounting for regime switches. Accounting for a potential fiscal limit, we test whether estimated Markov-switching fiscal policy rule fulfills a debt-stabilizing condition depending on two measures of the interest rate on public debt. With the average apparent rate, fiscal data rejects the null hypothesis of an explosive public debt-to-GDP ratio. Still, we are unable to reject it using the average market rate, thus suggesting unstable dynamics of the public debt-to-GDP ratio.

Suggested Citation

  • Pierre Aldama & Jérôme Creel, 2016. "Why fiscal regimes matter for fiscal sustainability analysis: an application to France," Sciences Po publications 2016-15, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/8g1v863ou8ne8avs9kr75pav8
    as

    Download full text from publisher

    File URL: http://spire.sciencespo.fr/hdl:/2441/8g1v863ou8ne8avs9kr75pav8/resources/wp2016-15-creel-whyfiscalregimes.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Creel, Jerome & Bihan, Herve Le, 2006. "Using structural balance data to test the fiscal theory of the price level: Some international evidence," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 338-360, June.
    2. Betty Daniel & Christos Shiamptanis, 2008. "Fiscal Policy in the European Monetary Union," Discussion Papers 08-11, University at Albany, SUNY, Department of Economics.
    3. Bettina Fincke & Alfred Greiner, 2012. "How to assess debt sustainability? Some theory and empirical evidence for selected euro area countries," Applied Economics, Taylor & Francis Journals, vol. 44(28), pages 3717-3724, October.
    4. Marcel Aloy & Gilles Dufrénot & Anne Péguin-Feissolle, 2014. "Is financial repression a solution to reduce fiscal vulnerability? The example of France since the end of World War II," Applied Economics, Taylor & Francis Journals, vol. 46(6), pages 629-637, February.
    5. Troy Davig, 2005. "Periodically expanding discounted debt: a threat to fiscal policy sustainability?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 829-840.
    6. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    7. Blot, Christophe & Ducoudré, Bruno & Timbeau, Xavier, 2016. "Sovereign debt spread and default in a model with self-fulfilling prophecies and asymmetric information," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 281-299.
    8. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-819, September.
    9. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, vol. 91(5), pages 1221-1238, December.
    10. Christian Schoder, 2014. "The fundamentals of sovereign debt sustainability: evidence from 15 OECD countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(2), pages 247-271, May.
    11. Wickens, M. R. & Uctum, Merih, 1993. "The sustainability of current account deficits : A test of the US intertemporal budget constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 423-441, May.
    12. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2013. "Fiscal space and sovereign risk pricing in a currency union," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 131-163.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. 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).

    More about this item

    Keywords

    Fiscal rules; Fiscal regimes; Public debt sustainability; Time varying parameters; Markov switching models;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    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:spo:wpmain:info:hdl:2441/8g1v863ou8ne8avs9kr75pav8. 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: (Spire @ Sciences Po Library). General contact details of provider: http://edirc.repec.org/data/ecspofr.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.