KLEM substitutability: a dynamic flexible demand system |
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| Authors: | Apostolos Serletis Subal C Kumbhakar |
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| Institution: | 1. Department of Economics , The University of Calgary , Calgary , Alberta , T2N1N4 , Canada;2. Department of Economics , The University of Texas at Austin , Austin , Texas , 78712 , USA |
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| Abstract: | The theory of intertemporal budget constraint is applied to test Italian public debt sustainability, with the finding that current fiscal policy has not been following a sustainable path in the 1980s. In particular, we find that (i) while primary surplus is stationary, public debt is not, (ii) permanent shocks explain about 90% of forecast error variance of public debt, while playing a minor role in primary surplus and (iii) debt is not sustainable even if stochastic discount rates are accounted for. |
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