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Measuring the Fiscal Stance


  • Vito Polito
  • Mike Wickens


In this paper we propose an index of the fiscal stance suitable for practical use in short-term policy making. The index is based on a comparison of a target level of the debt-GDP ratio for a given finite horizon with a forecast of the debt-GDP ratio based on a VAR formed from the government budget constraint. This approach to measuring the fiscal stance is different from the literature on fiscal sustainability. We emphasise the importance of having a forward-looking measure of the fiscal stance for the immediate future rather than a test for fiscal sustainability that is backward-looking, or based just on past behaviour which may not be closely related to the current fiscal position. We use our methodology to construct a time series of the indices of the fiscal stances of the US, the UK and Germany over the last 25 or more years. We find that both the US and UK fiscal stances have deteriorated considerably since 2000 and Germany's has been steadily deteriorating since unification in 1989, and worsened again on joining EMU.

Suggested Citation

  • Vito Polito & Mike Wickens, 2007. "Measuring the Fiscal Stance," Discussion Papers 07/14, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:07/14

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    References listed on IDEAS

    1. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
    2. Bohn, Henning, 1992. "Budget deficits and government accounting," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 37(1), pages 1-83, December.
    3. Trehan, Bharat & Walsh, Carl E., 1988. "Common trends, the government's budget constraint, and revenue smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 425-444.
    4. Paul R. Bergin & Steven M. Sheffrin, 2017. "Interest Rates, Exchange Rates and Present Value Models of the Current Account," World Scientific Book Chapters,in: International Macroeconomic Interdependence, chapter 10, pages 287-316 World Scientific Publishing Co. Pte. Ltd..
    5. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
    6. Ahmed, Shaghil & Rogers, John H., 1995. "Government budget deficits and trade deficits Are present value constraints satisfied in long-term data?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 351-374, November.
    7. Uctum, Merih & Wickens, Michael, 2000. " Debt and Deficit Ceilings, and Sustainability of Fiscal Policies: An Intertemporal Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(2), pages 197-222, May.
    8. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-271, February.
    9. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, vol. 29(3-4), pages 237-253, November.
    10. Henning Bohn, "undated". "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 03-91, Wharton School Rodney L. White Center for Financial Research.
    11. Trehan, Bharat & Walsh, Carl E, 1991. "Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 206-223, May.
    12. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-445, July.
    13. Bohn, Henning, 1991. "Budget balance through revenue or spending adjustments? : Some historical evidence for the United States," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 333-359, June.
    14. 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.
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    Cited by:

    1. Gabriella Legrenzi & Costas Milas, 2012. "Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS," Working Paper series 54_12, Rimini Centre for Economic Analysis.
    2. Reda, Cherif & Fuad, Hasanov, 2010. "Public Debt Dynamics and Debt Feedback," MPRA Paper 27918, University Library of Munich, Germany.
    3. guo, Min & zhao, jizhi & huang, yixuan, 2014. "国家债务适度规模研究 —基于因子增强阈值模型
      [a Study of Moderate Scale of Public Debt - Based on Factor-Augmented Threshold Model]
      ," MPRA Paper 56067, University Library of Munich, Germany.

    More about this item


    Budget deficits; government debt; fiscal sustainability; VAR analysis;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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