Interpretation and limits of sustainability tests in public finance

Interprétation et limites des tests de soutenabilité des finances publiques

Gildas Lamé, Matthieu Lequien and Pierre-Alain Pionnier
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Gildas Lamé: INSEE - Institut national de la statistique et des études économiques (INSEE)
Pierre-Alain Pionnier: INSEE - Institut national de la statistique et des études économiques (INSEE)

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Abstract: Public debt is considered sustainable if discounted net repayments are expected to cover the initial debt issuance, i.e. if the government intertemporal budget constraint is expected to hold. With risk averse lenders and an uncertain economic environment, Bohn (1995) stresses that this constraint relies on a stochastic discount factor which depends on lenders' preferences. To get round the difficulty related to the specification of private agents' preferences in empirical analysis, Bohn (1998) suggests to estimate fiscal reaction functions describing how primary surplus reacts to indebtedness. After having solved the econometric issues arising when primary surplus and debt have a very different persistence (with a nonparametric approach) or are both integrated (with parametric tests), we estimate fiscal reaction functions for France and for Greece. The empirical results highlight the remaining limitations and interpretation difficulties that plague these econometric sustainability tests.

Keywords: Intertemporal budget constraint; unit-roots; cointegration; fiscal reaction function; non-parametric tests; Contrainte de budget intertemporelle; racine unitaire; cointégration; fonction de réaction fiscale; tests non-paramétriques (search for similar items in EconPapers)
Date: 2013-03
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Related works:
Journal Article: Interpretation and limits of sustainability tests in public finance (2014)
Working Paper: Interpretation and limits of sustainability tests in public finance (2013)
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