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Fiscal Space in the Euro zone

  • Frantisek Hajnovic


    (National Bank of Slovakia, Research Department)

  • Juraj Zeman


    (National Bank of Slovakia, Research Department)

Registered author(s):

    This paper uses data from 1995 to 2008 to estimate debt limits in the European Union countries derived from the budgetary responses to debt levels before the crisis. Based on work by the IMF (Ostry, 2010), we present our suggested approach and estimate the fiscal reaction functions and the implied critical debt levels of EU governments. Since many countries did not take advantage of the boom years for consolidation, the fiscal space – availability of debt financing – in the euro zone has shrunk, especially in countries where the response to rising debt levels has historically been weak. We conclude by stressing a need for structural changes in budget policy (shifts in the reaction on debt) or risk default in cases where fiscal space was negative or has been squeezed.

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    Paper provided by Research Department, National Bank of Slovakia in its series Working and Discussion Papers with number WP 5/2012.

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    Length: 27 pages
    Date of creation: Dec 2012
    Date of revision:
    Handle: RePEc:svk:wpaper:1020
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    1. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122 National Bureau of Economic Research, Inc.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "A Decade of Debt," NBER Working Papers 16827, National Bureau of Economic Research, Inc.
    3. Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    5. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
    6. Alberto F. Alesina & Dorian Carloni & Giampaolo Lecce, 2011. "The Electoral Consequences of Large Fiscal Adjustments," NBER Working Papers 17655, National Bureau of Economic Research, Inc.
    7. repec:att:wimass:8813 is not listed on IDEAS
    8. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2011. "Debt Dilution and Sovereign Default Risk," IMF Working Papers 11/70, International Monetary Fund.
    9. Enrique G. Mendoza & Jonathan David Ostry, 2007. "International Evidenceon Fiscal Solvency: Is Fiscal Policy "Responsible"?," IMF Working Papers 07/56, International Monetary Fund.
    10. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
    11. Andrei Shleifer, 2003. "Will The Sovereign Debt Market Survive?," Harvard Institute of Economic Research Working Papers 2000, Harvard - Institute of Economic Research.
    12. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    13. Xavier Debrun, 2011. "Democratic Accountability, Deficit Bias, and Independent Fiscal Agencies," IMF Working Papers 11/173, International Monetary Fund.
    14. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," NBER Working Papers 16782, National Bureau of Economic Research, Inc.
    15. Eric Mayer & Nikolai Stähler, 2013. "The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule," Empirica, Springer, vol. 40(1), pages 39-74, February.
    16. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2009. "Institutions, Public Debt and Foreign Finance," Carlo Alberto Notebooks 124, Collegio Carlo Alberto.
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