Assessing fiscal sustainability subject to policy changes: a Markov switching cointegration approach

We propose a Markov switching cointegration approach to assess long run fiscal sustainability. This method allows us to simultaneously: (1) test for cointegration in the presence of significant fiscal policy changes; (2) assess the type of fiscal regime that a country experienced at a given period and (3) analyse the timing of the transition between the estimated regime types. Given its flexibility, our approach enable us to uncover a richer and more complex dynamics in the analysis of fiscal sustainability, which standard linear cointegration methods fail to capture.     

Policy mix and debt sustainability: evidence from fiscal policy rules

This paper characterizes rules-based fiscal policy setting for G-3 and large EMS countries. We set up a simple fiscal policy rule and then infer on the policymakers’ reaction coefficients by testing with GMM. Our results qualify existing evidence on systematic fiscal policy in two respects. First, fiscal policy usually stabilizes public debt; and there is indeed substantial interaction between fiscal and monetary policies via the policy mix or the debt channel. Second, sustainability is achieved with a “stop–go” cycle of consolidation. Unless debt ratios are high, consolidation does not come at the cost of less cyclical stabilization.     

Fiscal regime shifts in Portugal

We estimate changes in fiscal policy regimes in Portugal with a Markov Switching regression of fiscal policy rules for the period 1978–2007, using a new dataset of fiscal quarterly series. We find evidence of a deficit bias, while repeated reversals of taxes making the budget procyclical. Economic booms have typically been used to relax tax pressure, especially during elections. One-off measures have been preferred over structural ones to contain the deficit during economic crises. The EU fiscal framework prompted temporary consolidation, but did not permanently change the budgeting process.     

Investment scaling up and the role of government

This article studies the fiscal and welfare implications of a scaling up of public investment when the government is subject to inefficiencies on the spending and on the tax collection side. In our simulations, the scaling up of public investments results in higher long-run output and consumption levels but requires a fiscal stabilization package in order to preserve fiscal sustainability. The effects on consumers’ welfare after the fiscal adjustment are nontrivial. Our welfare analysis shows that consumers’ welfare is increased when the government smooths the fiscal adjustment via higher borrowing and not through an increase in taxation. Moreover, the comparison between several stabilization packages via tax adjustment shows that higher welfare is achieved when the government relies mostly on taxation of capital as this allows higher levels of consumption. Lower fiscal costs that do not undermine fiscal sustainability can however be achieved if the government manages to reduce inefficiency in tax collection. Finally, we consider a change in the trade regime that causes a decline in revenues. We find that the higher fiscal burden required to preserve fiscal sustainability would completely wipe out the welfare gain of higher public investments.     

The risk of falling house prices in Italy

This paper shows that Italian house market is less exposed to price shocks than the American one. Variations in the house price index in real terms have been studied along with the affordability ratio and the relation between house prices and rent levels for the period 1995–2004 in Italian provinces. Comparison with US data reveals greater overpricing in the US during the expansion phase (2000–2004). Although a speculative bubble in all US metropolitan areas considered does not emerge, US financial and economic structural factors make the US real estate sector more exposed to price shocks. To test the compatibility of Italian house prices with fundamentals an econometric model is designed to analyze the provincial house prices from 1995 to 2003.     

On the mechanisms of achieving fiscal (un)sustainability: the case of Poland

Aim of this paper is to assess empirically the sustainability of budgetary policy in Poland in years 1992–2006. Our results show that structural surplus did respond to fiscal shocks in a way that stabilizes debt. However, the debt-stabilizing mechanism relied entirely on the revenue side, while the expenditures moved independently from debt and in a way that is close to non-stationarity. Given numerous bounds on increasing fiscal revenues, such an asymmetric mechanism of ensuring sustainability of Polish public finances is likely to fail if pressure on increasing public expenditures remains high over prolonged periods.     

中国地方政府债务可持续、财政空间与经济增长*

根据Ghosh et al（2013）财政空间理论，利用2010—2019中国省级面板数据，对中国省级政府债务可持续、财政空间和经济增长之间的关系及其机制进行了研究。结果表明，中国个别省份出现了财政疲劳现象，要把控好债务风险雷区，但各地区债务限额存在异质性，在不损害可持续性的情况下，大部分地方政府有足够的“回旋余地”实施财政刺激政策。我国省级政府的财政空间和经济增长之间存在倒“U”型关系，即当政府负债率高于财政空间的临界点（或较低的财政空间）时开始阻碍经济增长，因此，需要通过降低政府负债率实现更高的增长。进一步研究发现，政府债务影响经济增长最重要的渠道是公共投资和私人投资，全要素生产率、储蓄和长期真实利率也是政府债务影响经济增长的重要渠道，而长期名义利率未能成为政府债务影响经济增长的渠道。     

Debt sustainability in emerging market countries: Some policy guidelines from a fan-chart approach

This paper uses a probabilistic approach to simulate the medium-term public debt trajectories of several major emerging market countries. We extend the standard debt sustainability analysis framework so as to more faithfully reproduce these countries’ economic reality in two aspects. First, we allow them to differ in the cyclical stance of their fiscal policy and in their degree of fiscal responsiveness to debt. Second, we explicitly integrate the specific risk premium paid by each country when borrowing in foreign currency. It allows us to evaluate the impact of alternative policies that the government may consider to improve sustainability. The results lead to three policy recommendations: i) a country should consider decreasing its exposure to currency risk only in extreme cases (like Argentina); ii) on the contrary, greater fiscal responsiveness (i.e. stronger fiscal tightening whenever there is a debt increase) could enhance sustainability to a much greater extent; iii) countries with low responsiveness to debt or a poor fiscal consolidation track record should be cautious with countercyclical fiscal policies, as they may trigger an unsustainable debt trajectory in the trough of the economic cycle.     

Supranational integration and national reorganization: On the Maastricht treaty’s impact on fiscal decentralization in EU countries

We explore the implications of European integration for fiscal decentralization in EU member states with a dataset on 21 OECD countries over the 1975–2000 period. The difference-in-difference methodology is used to establish causality. EU member states are classified as the treatment and non-EU OECD countries as the control group. The Maastricht treaty is interpreted as a quasi-experimental policy intervention that substantially advanced European integration. Our results suggest that tax decentralization has increased in EU countries after the signing of the Maastricht treaty. The treaty’s effect on expenditure decentralization also seems to be positive, but is less clear-cut.     

财政可持续性与地方政府教育努力程度*

财政可持续性是影响政府教育努力程度的重要因素。本文基于2015—2019年城市面板数据测算了地方政府的财政可持续性指标，考察了财政可持续性对地方政府教育投入水平的影响。研究发现：我国大部分地级市都处于财政可持续状态，地方政府逐年上升的财政可持续性风险将降低政府教育努力程度，这一效应在东部地区和中部地区以及经济较发达城市尤为显著。     

Aging: Some Pleasant Fiscal Arithmetic

Projections of age-related public expenditure growth have raised widespread concerns about fiscal sustainability. This paper examines how total expenditure would develop under four policy rules on public expenditure growth. Some simple arithmetic of expenditure, GDP, and population is reviewed and applied in simulations for 19 OECD countries over 2000–50. A general and a specific conclusion arise from the results. Generally, long-term expenditure projections could benefit from revisiting common assumptions on non-age-related expenditure growth. Specifically, realistic gradual adjustment in non-age-related expenditures could go a long way towards maintaining fiscal sustainability under age-related spending pressures.

Arithmetic visibility estimates for OECD countries with three government levels

The importance of fiscal visibility has been well known for a long time but attempts to quantify it by taking the internal structure of every type of revenue and expenditure in a fiscal system into consideration are recent. Indicators used until now rest on structural parameters combined in a multiplicative way with a 0 estimate always resulting in at least one of such factors being null. An alternative way to measure fiscal visibility consists of combining parametric values in an additive instead of a multiplicative form. Calculations can then show estimates which are much more sensitive to the initial values. The aim of this contribution is to present new additive indicators that are applied to several territorial government levels in Australia, Austria, Canada, Germany, Spain, Switzerland, and the U. S. Comparisons, conclusions, and comments are offered for general development. An earlier version of this article was presented at the 55th International Atlantic Economic Conference, Vienna, Austria, March 12–16, 2003. The author is indebted to participants of this conference for helpful comments. The responsibility for any errors or shortcomings are the author's.     

Comparative analyses of fiscal sustainability of the budgetary policy rules

We construct a continuous-time overlapping generations model with an endogenous growth structure and consider fiscal sustainability under two fiscal rules: (i) the government fixes the budget deficit-to-GDP ratio and (ii) the government fixes the primary balance-to-GDP ratio. Under the constant budget deficit-to-GDP rule, fiscal sustainability is ensured when the initial public debt-to-GDP and budget deficit-to-GDP ratios are sufficiently small. Under the constant primary balance-to-GDP rule, it is difficult to ensure fiscal sustainability when the primary balance is in deficit or zero. However, fiscal sustainability is ensured when the primary balance is in surplus and the initial government debt-to-GDP ratio is sufficiently small.     

Does performance explain mutual fund flows in small markets? The case of Portugal

We study the performance reaction of investors in a specific small market context. Our sample includes all Portuguese open-end equity funds that invested in stocks issued by Portuguese companies in the period December 1993–June 2009. Instead of the convex flow–performance relationship usually documented for the US, we find an absence of reaction to past performance. We find no evidence to support the “smart money effect”, given that capital flows do not favour next period performance winners. We also document persistence of fund flows. Our results are consistent with the idea that large financial intermediaries have the capacity “to drive” their customers to funds with larger fees.     

On the Sustainability of Austrian Budgetary Policies

The question whether fiscal policies are sustainable in the long run has received much attention in the international political agenda. In this paper, we investigate whether Austrian fiscal policy has been sustainable during the last four decades. We apply several econometric approaches to test for the sustainability of fiscal policies. The results are ambiguous. For the period of 1960–1974, we find evidence for sustainable fiscal policies. For the period 1975–1999, the results indicate that Austrian fiscal policy was not sustainable in the long run. If Austrian policy-makers do not change their budgetary policy in the future, the long-term budget constraint of the state will be violated.     

Aggregation Biases in Estimates of the Value per Statistical Life: Evidence from Longitudinal Matched Worker-Firm Data in Taiwan

This study uses a unique longitudinally-linked employer–employee dataset to estimate the magnitude of bias in estimating the value per statistical life (VSL) that arises from the conventional use of industry-average occupational risk. This unique dataset, covering workers in Taiwan over the period 1998–2002, allows us to distinguish among potential sources of bias including omitted variables and to control for the potential endogeneity of firm-specific job risk with respect to unobserved worker and firm characteristics. We find that VSL estimates based on risk data aggregated by three-digit manufacturing SIC codes are biased downward by an order of magnitude compared with estimates using firm-specific risk that control for endogeneity.     

Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears

For the period 2003–2014, we investigate unexplored effects of fiscal consolidation in decentralized public finance on a large dataset of Italian municipalities. Based on a simple, realistic theoretical model, we show that municipalities increase arrears on committed investment expenditure as a response to intergovernmental transfer cuts. Then, we test our predictions controlling for potential sources of endogeneity, and find that a reduction in intergovernmental transfers causes a significant increase in arrears, in addition to other common adjustments to local fiscal policies (e.g., tax revenues). Our results highlight a perverse effect of fiscal consolidation packages implemented by centrally imposed fiscal restraints.     

Fiscal policy in the US: Sustainable after all?

The sustainability of US public debt has been widely discussed since the Great Recession. Using annual data since 1940, we estimate and compare different specifications of fiscal rules. Estimates of constant-parameter fiscal rules show no evidence of sustainability. This may be due to the instability of government's behaviour over time. Thus, we estimate a Markov-switching fiscal rule in order to identify periods of unsustainable and sustainable fiscal policies. First, we show that the government stabilizes public debt only periodically. Second, during these periods, the government's reaction is sufficiently tight to stabilize public debt over the entire horizon. We conclude that a relatively short-lived but tight fiscal contraction can be sufficient to ensure long-run US debt sustainability.     

Keynes and Wagner on government expenditures and economic development: the case of a developing economy

This paper investigates the Keynesian view and the Wagner’s Law on the role of public expenditure on economic growth for Malaysia (1970–2004). The empirical results using the Auto-Regression Distributed Lag (ARDL) model and the ‘bounds test’ (Pesaran et al. in J Appl Econ 16:289–326, 2001) showed evidence of a long run relationship between total expenditures (including expenditures on defense, education, development and agriculture) and Gross National Product. The results also show that with the structural break in 1998, the long run causality is bi-directional for GNP and expenditures on administration and health, supporting both Keynes view and Wagner’s Law. For all other expenditure categories the long run causality runs from GNP to the expenditures, which supports Wagner’s Law. An erratum to this article can be found at     

Regime changes and fiscal sustainability in Kenya

Kenya's fiscal policy landscape is characterized by primary deficit spending forcing the government to rely on debt to meet its objectives. The justification often being that as a developing economy, annual growth rates and future prospects may in the short run justify the uptake of debt to finance infrastructural development. However, given potential fiscal limits, fiscal cycles usually alternates between sustainable and unsustainable regimes and this has a bearing on long run sustainability. This study therefore sought to investigate the nature of fiscal policy regime in Kenya and the extent to which fiscal policy is sustainable in the long run taking into account periodic regime shifts. Markov switching models were used to endogenously determine fiscal policy regimes. Regime switching tests were used to test whether No-Ponzi game condition and debt stabilizing condition were met. The results established that regime switching model was suitable in explaining regime sustainable and unsustainable cycles. An investigation of fiscal policy regimes established that both sustainable and unsustainable regimes were dominant, and each lasted for an average of four years. There was evidence to imply the existence of procyclical fiscal policy in Kenya. Regime switching tests for long run sustainability suggested that the No-Ponzi game condition weakly holds in the Kenyan economy. Regime-based sensitivity analysis indicated that persistence of unsustainability regime for more than 4 years could threaten long-run fiscal sustainability.