The mirror does not lie: Endogenous fiscal limits for Slovakia

Zuzana Mucka ()
Additional contact information
Zuzana Mucka: Council for Budget Responsibility

Working Papers from Council for Budget Responsibility

Abstract: We study the interactions among fiscal policy, fiscal limits and the associated sovereign risk premium. The fiscal limit distribution, which measures the ability of the government to service its debt, arises endogenously from dynamic Laffer curves. We assume a feedback loop between the fiscal limit distribution and the risk premium and determine them simultaneously using and efficient iterative scheme. A nonlinear relationship between the sovereign risk premium and the level of government debt then emerges in equilibrium. The model is calibrated to Slovak data assuming steeply growing age-related transfers and volatile business cycle. We study the impact of various model parameters on the conditional (state-dependent) and unconditional distributions of the fiscal limit. Fiscal limit distributions obtained via Markov–Chain–Monte–Carlo regime switching algorithm depend on the rate of growth of government transfers, the degree of countercyclicality of policy, and the distribution of the underlying economic conditions. We find that both distributions are considerably more heavy-tailed compared with those usually obtained in the literature for advanced economies, and are very sensitive to the size and rate of growth of transfers, the business cycle phase and the fiscal policy credibility. The main policy message is that the Maastricht debt limit of 60 percent of GDP is not safe enough for Slovakia. Furthermore, credible reforms reining in age-related spending and thus stabilising public finance in the long-run, should be a priority.

Keywords: Simulation Methods and Modelling; Fiscal Policy; Government Expenditures; Debt Management and Sovereign Debt (search for similar items in EconPapers)
JEL-codes: C15 C63 E62 H5 H63 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2019-05
New Economics Papers: this item is included in nep-cmp, nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.rrz.sk/wp-content/uploads/2021/05/Fisc ... ror-Does-Not-Lie.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbe:wpaper:201902

Access Statistics for this paper

More papers in Working Papers from Council for Budget Responsibility Contact information at EDIRC.
Bibliographic data for series maintained by ().