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Why fiscal regimes matter for fiscal sustainability analysis: an application to France

Pierre Aldama () and Jerome Creel ()

No 2016-15, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: This paper introduces a Regime-Switching Model-Based Sustainability test allowing for periodic (or local) violations of Bohn (1998, QJE)’s sustainability condition. We assume a Markov-switching fis- cal policy rule whose parameters stochastically switch between sustainable and unsustainable regimes. We demonstrate that long-run fiscal sustainability not only depends on regime-specific feedback coef- ficients of the fiscal policy rule but also on the average durations of fiscal regimes. Evidence on French data suggests that the No-Ponzi game condition weakly holds in the long run, when accounting for regime switches. Accounting for a potential fiscal limit, we test whether estimated Markov-switching fiscal policy rule fulfills a debt-stabilizing condition depending on two measures of the interest rate on public debt. With the average apparent rate, fiscal data rejects the null hypothesis of an explosive public debt-to-GDP ratio. Still, we are unable to reject it using the average market rate, thus suggesting unstable dynamics of the public debt-to-GDP ratio.

Keywords: Fiscal rules; Fiscal regimes; Public debt sustainability; Time varying parameters; Markov switching models (search for similar items in EconPapers)
JEL-codes: E6 H6 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (13) Track citations by RSS feed

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