Fiscal Consolidation and the Probability Distribution of Deficits: A Stochastic Analysis of the Stability Pact
Using stochastic simulations, this paper analyses the probability distribution of a country's deficit ratio under fixed exchange rates and a variety of monetary policy rules. The purpose is to show how the probability of getting an "excessive deficit", defined as a deficit / GDP ratio in excess of 3% by Europe's Stability Pact, varies with different deficit target rules and different fiscal and monetary policy rules. We find that these fiscal ratios typically have a wide distribution, with fat tails and significantly longer tails on the upper side. That means fiscal targets may have to be country specific and conservative, and that fiscal policy has to be forward looking to keep the probability of excessive deficits below acceptable limits.
|Date of creation:||Jan 2001|
|Date of revision:|
|Contact details of provider:|| Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP|
Phone: +44 (0)1227 827497
Web page: http://www.kent.ac.uk/economics/
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:sae:niesru:v:164:y::i:1:p:90-99 is not listed on IDEAS
- Mitchell, Peter R. & Sault, Joanne E. & Smith, Peter N. & Wallis, Kenneth F., 1998. "Comparing global economic models," Economic Modelling, Elsevier, vol. 15(1), pages 1-48, January.
- Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
- Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar S Prasad, 1998. "Multimod Mark III; The Core Dynamic and Steady State Model," IMF Occasional Papers 164, International Monetary Fund.
- McAdam, Peter & Hughes Hallett, A J, 1999. " Nonlinearity, Computational Complexity and Macroeconomic Modelling," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 577-618, December.
- Artis, Michael J & Buti, Marco, 2000.
""Close to Balance or in Surplus": A Policy Maker's Guide to the Implementation of the Stability and Growth Pact,"
CEPR Discussion Papers
2515, C.E.P.R. Discussion Papers.
- Michael J. Artis & Marco Buti, 2000. "'Close-to-Balance or in Surplus': A Policy-Maker's Guide to the Implementation of the Stability and Growth Pact," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 563-591, November.
- Michael J. Artis & Marco Buti, 2000. "Close to Balance or in Surplus. A Policy Maker’s Guide to the Implementation of the Stability and Growth Pact," EUI-RSCAS Working Papers 28, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- Salmon, Mark H, 1982.
"Error Correction Mechanisms,"
Royal Economic Society, vol. 92(367), pages 615-29, September.
- Salmon, Mark, 1982. "Error Correction Mechanisms," The Warwick Economics Research Paper Series (TWERPS) 199, University of Warwick, Department of Economics.
- Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, vol. 17(2), pages 171-193, April.
- Paul R Masson & Bart Turtelboom, 1997. "Characteristics of the Euro, the Demand for Reserves, and Policy Coordination Under EMU," IMF Working Papers 97/58, International Monetary Fund.
- Juillard, Michel & Laxton, Douglas & McAdam, Peter & Pioro, Hope, 1998. "An algorithm competition: First-order iterations versus Newton-based techniques," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1291-1318, August.
When requesting a correction, please mention this item's handle: RePEc:ukc:ukcedp:0101. 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: (Tracey Girling)
If references are entirely missing, you can add them using this form.