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

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  • ​pierre Aldama
  • 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
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    Cited by:

    1. 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).
    2. Hollmayr, Josef, 2018. "Fiscal regimes and the (non)stationarity of debt," Discussion Papers 11/2018, Deutsche Bundesbank.
    3. 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).
    4. Jerome Creel, 2020. "Fiscal space in the euro area before Covid-19," Economics Bulletin, AccessEcon, vol. 40(2), pages 1698-1706.
    5. William Nganga & Julien Chevallier & Simon Ndiritu, 2018. "Regime changes and fiscal sustainability in Kenya with comparative nonlinear Granger causalities across East-African countries," Working Papers halshs-01941226, HAL.
    6. Irungu, William Nganga & Chevallier, Julien & Ndiritu, Simon Wagura, 2020. "Regime changes and fiscal sustainability in Kenya," Economic Modelling, Elsevier, vol. 86(C), pages 1-9.

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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:

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

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