Fiscal reaction functions for the advanced economies revisited

Francesca Di Iorio and Stefano Fachin

Empirical Economics, 2022, vol. 62, issue 6, No 9, 2865-2891

Abstract: Abstract We revisit the relationship between the primary balances/GDP and debt/GDP ratios (fiscal reaction function, FRF), in the advanced economies, showing that using adequate tests and estimators leads to question the validity of the current consensus. Using data for 1961–2019, we find that long-run FRFs exist only in a small number of advanced economies (Belgium, Germany, Greece, Norway, Portugal and Sweden), with polynomial effects with fiscal fatigue only in Germany. These results warn against the widespread practice of estimating homogeneous polynomial panel FRFs. Limiting the sample to 1961–2007, thus excluding the 2008 crisis and its aftermath, FRFs hold also in Canada, Ireland, Italy (polynomial), Spain and USA, though not in Germany, and the coefficients are generally larger. Particularly, after 2008 European Union countries appear somehow to have been more likely to implement FRFs.

Keywords: Public debt; Fiscal reaction function; Fiscal sustainability; Panel cointegration; Cointegrating polynomial regression; OECD (search for similar items in EconPapers)
JEL-codes: C23 C32 E62 H62 H63 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s00181-021-02119-y

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