Fiscal Reaction Functions Across the World: In Quest of Statistical (In)significance

Antonio Afonso and Joao Jalles

FinanzArchiv: Public Finance Analysis, 2019, vol. 75, issue 3, 207-228

Abstract: We estimate fiscal reaction functions for a panel of 173 countries using data between 1970 and 2014. Most notably, we assess the existence of non-Ricardian regimes, as postulated in the fiscal theory of the price level (FTPL), or, contrarily, the possibility of Ricardian regimes. We find that governments have on average increased the primary balance as a response to higher previous government indebtedness, implying a Ricardian fiscal regime. In addition, the Ricardian results are confirmed for the advanced countries and for the euro area group. A more Ricardian fiscal regime emerged after 1995 and notably in the subperiod 2008-2014, after the global financial crisis (before that, statistical insignificance is the norm). From a P-VAR analysis, we find that increases in government indebtedness increase primary balances, supporting overall the existence of an average Ricardian fiscal regime.

Keywords: fiscal reaction function; panel data; panel VAR; cross-sectional dependence; global financial crisis (search for similar items in EconPapers)
JEL-codes: C23 E62 H62 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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DOI: 10.1628/fa-2018-0023

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