Measuring Fiscal Sustainability

Vito Polito and Michael Wickens

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We propose an index of the fiscal stance that is convenient for practical use. It is based on a finite time horizon, not on an infinite time horizon like most tests. As it employs VAR analysis it is simple to compute and easily automated. We also show how it is possible to analyse a change of policy within a VAR framework. We use this methodology to examine the effect on fiscal sustainability of a change in policy. We then conduct an empirical examination of the fiscal stances of the US, the UK and Germany over the last 25 or more years, and we carry out a counter-factual analysis of the likely consequences for fiscal sustainability of using a Taylor rule to set monetary policy over this period. Among our findings are that the recent fiscal stances of all three countries are not sustainable, and that using a Taylor rule in the past would have improved the fiscal stances of the US and UK, but not that of Germany.

Keywords: Budget deficits; government debt; fiscal sustainability; VAR analysis; economic policy. (search for similar items in EconPapers)
JEL-codes: C22 C53 E62 E63 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Working Paper: Measuring Fiscal Sustainability (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:san:cdmacp:0503

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