Testing fiscal sustainability in Poland: a Bayesian analysis of cointegration

Fiscal sustainability is a central topic for most of the transition economies of Eastern Europe. This paper focuses on a particular country: Poland. The main purpose is to investigate, empirically, whether the post-transition fiscal policy is consistent with the intertemporal budget constraint, used as a formal theoretical framework. To test debt stabilization, the empirical analysis is made in two steps: first, we use a Bayesian methodology to conduct inference about the cointegrating relationship between budget revenues and (inclusive of interest) expenditures and to select the cointegrating rank. Second, we apply Bayesian inference to the estimation of the cointegrating vector and of the adjustment parameters. With a single cointegrating relation, we make use of some known results concerning the posterior density of the cointegrating vector, which belongs to the poly-t densities class. In this way, we experiment the usefulness of Bayesian inference in precisely assessing the magnitude of the cointegrating vector. Moreover, we show to what extent the likelihood of the data is important in revising the available prior information, relying on numerical integration techniques.     

The fiscal outlook in Austria: an evaluation with Generational Accounts

During the next few decades the populations of most developed countries will grow older and older as a result of the low fertility rates since the 1970s and/or the continuously increasing life expectancy. Generational Accounting which was introduced in the early 1990s, can illustrate the effects of this ageing process on a country’s fiscal situation and on the intergenerational redistribution. Austria’s age dependency ratio will more than double over the next four decades in most official projections. In our paper we quantify for Austria how unsustainable its public finances are due to the demographic development. We show that despite recent reforms of the pension and health systems the demographic development produces a major problem for Austria’s coffers. Furthermore we compare our results to similar calculations for Germany and Switzerland.     

The sustainability of Portuguese fiscal policy from a historical perspective

This paper analyses the sustainability of Portuguese public finances, making use of a long dataset with more than a full century of observations. The use of such a long dataset is appropriate because both the unit root and co-integration tests on which the sustainability testing procedure is based require a long period of data. We find considerable evidence in favor of sustainability for the 1903–2003 period which is not, however, maintained for the more recent 1975–2003 period, as it is characterized by the largest GDP deficit ratios of our sample. This latter period appears to signal a shift to an unsustainable path in Portuguese fiscal policy. Hence, our results suggest that fiscal consolidation efforts must, in fact, be continued in Portugal.Paper presented at the 2004 CESifo-LBI Conference on “Sustainability of Public Debt”, October 22–23 2004, Munich.     

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.     

The pace of fiscal consolidations,fiscal sustainability,and welfare: An overlapping generations approach

This study investigates expenditure- and tax-based consolidations under the rule of reductions in debt-to-GDP ratios to the target level and the effects of these consolidations on fiscal sustainability and welfare, using an overlapping generations model with exogenous growth settings. We derive (i) a threshold (ceiling) of public debt to ensure fiscal sustainability, (ii) sustainable paces of these consolidations, and (iii) the optimal pace of consolidations under both expenditure- and tax-based consolidations, examining whether these consolidations are effective in the sense that they are sustainable, increase welfare, and induce fairness of welfare distribution across generations (lower intergenerational conflicts over welfare). We find that the pace of tax-based consolidation required to ensure fiscal sustainability is higher than that required for expenditure-based consolidation. As for welfare, countries may differ in their choice of the type of consolidation, which depends on the size of outstanding debts relative to capital, the economy’s productivity, tax rate levels, and the extent of utility derived by individuals from public goods and services. More importantly, it may also depend on whether policymakers emphasize social welfare or fairness of welfare distribution between generations. By contrast, a common result from the viewpoints of both social welfare and fair distribution of welfare across generations is that fiscal consolidation cannot persist much longer than 30 years (one period in the model). This result will support the pace of consolidation in the EU: the Stability and Growth Pact.     

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.     

A new test for fiscal sustainability with endogenous sovereign bond yields: Evidence for EU economies

In this paper we develop a new test for fiscal sustainability and propose a synthetic fiscal sustainability indicator. Conventional tests based on fiscal reaction functions assume a constant real interest rate. However, many empirical studies find evidence on a positive response of long-term rates to sovereign debt levels. We take this evidence into account and endogenize the long-term real interest rate in testing fiscal sustainability. We apply the new test for the European economies. We find that considering the response of interest rate to debt may change the assessment of fiscal sustainability. More specifically, our results indicate that fiscal sustainability is at risk in a number of European Union economies, even if the results of traditional approaches suggest sustainable fiscal policy.     

Testing the sustainability of German fiscal policy: evidence for the period 1960–2003

In this paper we test whether German public debt has been sustainable by testing how the primary surplus to GDP ratio reacts to the debt to GDP ratio. We apply semi-parametric regressions with time depending coefficients. This test shows that the mean of the coefficient relevant for sustainability is significantly positive over the time period considered. However, there is a negative trend in that coefficient which seems to have ceased to decline only in the middle to late 1990s.     

Debt ceiling and fiscal sustainability in Brazil: A quantile autoregression approach

In this paper we investigate fiscal sustainability by using a quantile autoregression (QAR) model. We propose a novel methodology to separate periods of nonstationarity from stationary ones, allowing us to identify various trajectories of public debt that are compatible with fiscal sustainability. We use such trajectories to construct a debt ceiling, that is, the largest value of public debt that does not jeopardize long-run fiscal sustainability. We make an out-of-sample forecast of such a ceiling and show how it could be used by Policy makers interested in keeping the public debt on a sustainable path. We illustrate the applicability of our results using Brazilian data.     

Testing for fiscal sustainability: New evidence from the G-7 and some European countries

Whether or not a government deficit is sustainable has important implications for policy. If the debt of a nation is sustainable, then it implies that the government should have no incentive to default on its internal debt. In this article we examine whether or not the debt-GDP ratios of the G-7 and some European countries can be characterized by a unit root process with the non-linear trend and asymmetric adjustment. The econometric methodology allows us to determine whether the stationarity holds for the government's debt–GDP ratio after considering the non-linear trend. Among the main results, it is found that it is very likely that the debt–GDP ratios of Canada, Germany, the US and Italy are stationarity after taking account of the non-linear trend in the long run. Nevertheless, it is model-dependent for the debt–GDP ratios of these countries to be asymmetrically adjusted after taking the non-linear trend into consideration.     

Seigniorage and Japanese fiscal sustainability: Simulation analysis using an overlapping generations model

This study examines two tax policies for achieving fiscal sustainability in Japan: (i) an increase in consumption tax and (ii) consumption tax hike combined with inflation. To evaluate these policies from both fiscal and welfare perspectives, I develop a multi-period overlapping generations model with money. The results reveal that, compared to the first policy, the second policy can substantially delay the timing of and curb the increase in consumption tax through seigniorage revenue. This suggests seigniorage could be a useful tool for the Japanese government in resolving its fiscal problems. In addition, in an aging Japan, the second policy can enhance future generations’ utility. Because inflation reduces money holdings and utility of the elderly, policies that cause inflation in the present but reduce it in the future improve the utility of future generations. From a social welfare viewpoint, such policies are desirable in a government that has foresight.     

Comparative fiscal illusion: a fiscal illusion index for the European Union

This paper provides an empirical analysis of fiscal illusion by estimating an index of fiscal illusion for 28 European countries over the period 1995–2008 employing a structural equation approach. Using Multiple Indicators Multiple Causes models, the paper investigates the main indicators of fiscal illusion and develops an index of fiscal illusion. It concludes that the chief determinants for the deployment of fiscal illusion strategies are the share of self-employment on total employment, the educational level of citizens, and the size of tax burden. At the same time, policy makers attempt to ‘conceal’ the real tax burden by means of debt illusion, fiscal drag, wage withholding taxes, as well as taxes on labour.     

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.     

A tool for fiscal policy planning in a medium-term fiscal framework: The FMM-MTFF model

This paper describes the FMM-MTFF model, a dynamic stochastic general equilibrium model developed to support the implementation of a Medium-Term Fiscal Framework (MTFF) in emerging market and developing economies. The model exhibits the following features. First, fiscal policy is defined in terms of multi-year fiscal plans, instead of restricting attention to univariate, single-period fiscal shocks. Second, the model temporarily deactivates the fiscal rule to avoid forcing fiscal policy to be mechanically countercyclical and sustainable. Third, the model is calibrated to match a three-sector, stylized version of a country’s input-output table, and finally, the model uses a chain-weighted procedure to measure GDP, a method consistent with what national account compilers do. The model is calibrated to Colombian and Peruvian data to illustrate the use of the model as a tool to quantify the scale of the fiscal challenges, to provide consistent medium-term macro fiscal projections and to assess the quantitative implications of past reforms and alternative fiscal policy plans on the economies, i.e., the typical questions of interest to an MTFF.     

Business incentives for sustainability: a property rights approach

Public and private demands for sustainable development put pressure on firms to develop strategies that include environmental concerns. Environmental effects from products often appear as externalities, outside the legal boundary of the producing company. These companies often possess the best competence to optimise the total life cycle environmental performance of its products. They are, however, neither obliged nor stimulated enough by policy incentives to do so from a sustainable development perspective. The policy instruments used today are mostly of a control-and-demand type, i.e. they do not create sufficient incentives to go further than hedging over set requirements. Environmental concerns and tightened environmental policy parameters have mostly been associated with the notion of additional costs and thus a restriction on economic performance. However, since the mid 1990s, several papers have called for corporate win–win situations as well as instruments giving up-stream incentives for change, but not enough abatement of environmental impacts has emerged in reality. Perhaps this is due to the lack of proper connection between economic theory on the one hand, and incentive advocating articles and instruments on the other. We propose a concept for trading of product life cycle (PLC) emission rights, based on property rights and transaction cost theories considering the problem with asymmetric information over the value chain. The initial financial impacts from such PLC instruments are shown to be significant for the system provider, since emissions—and resource use—become production costs. This provides economic incentives to take an increased responsibility for information flow as well as initiatives for product innovations.     

亦凉亦热亦起亦落--2000年国际建筑市场回顾

自从《工程新闻记录》（ＥＮＲ）在１９９８年底进行国际建筑市场统计以来的两年间，国际建筑市场又经历了一些起伏波动。在１９９８年底，国际金融市场和国际工程承包商依然步履蹒跚地行走在１９９７年亚洲金融危机和１９９８年初俄罗斯经济衰退的阴影中，另外，巴西金融巨变也沉重地打击了拉美各国的市场。那时，ＥＮＲ对全球建筑业市场的统计是３．２２万亿美元。根据ＥＮＲ出版的２０００年１２月４日杂志的最新统计，尽管全球范围内经济经历了如此多的磨难，但是在两年以后，全球建筑市场依然增长了５．８％，达到３．４１万亿美元。然…     

Toward a Taylor rule for fiscal policy

In DSGE models, fiscal policy is typically described by simple rules in which tax rates respond to the level of output. We show that there is only weak empirical evidence in favor of such specifications in US data. Instead, the cyclical movements of labor and capital income tax rates are better described by a contemporaneous response to hours worked and investment, respectively. We show that conditioning on these variables is also desirable from a normative perspective as it significantly improves welfare relative to output-based rules.     

Regional sustainability: How useful are current tools of sustainability assessment at the regional scale?

Sustainability assessment methods are primarily aimed at global, national or state scales. However, modelling sustainability at finer spatial scales, such as the region, is essential for understanding and achieving sustainability. Regions are emerging as an essential focus for sustainability researchers, natural resource managers and strategic planners working to develop and implement sustainability goals. This paper evaluates the effectiveness of current sustainability assessment methods - ecological footprint, wellbeing assessment, ecosystem health assessment, quality of life and natural resource availability - at the regional scale. Each of these assessment methods are tested using South East Queensland (SEQ) as a case study. It was selected because of its ecological and demographic diversity, its combination of coastal and land management issues, and its urban metropolitan and rural farm and non-farm communities. The applicability of each of these methods to regional assessment was examined using an evaluation criteria matrix, which describes the attributes of an effective method and the characteristics that make these methods useful for regional management and building community capacity to progress sustainability. We found that the methods tested failed to effectively measure progress toward sustainability at the regional scale, demonstrating the need for a new method for assessing regional sustainability.