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Why Fiscal Regimes Matter for Fiscal Sustainability: An Application to France

Pierre Aldama () and Jerome Creel ()

No 2017.01, Working Papers from International Network for Economic Research - INFER

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 fiscal 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 coefficients of the fiscal policy rule but also on the average durations of fiscal regimes. Evidence on French data suggests that both the No-Ponzi Game condition and the Debt-stabilizing condition hold in the long-run, when accounting for fiscal regimes, contrary to standard MBS tests.

Keywords: Fiscal rules; Fiscal regimes; Public debt sustainability; Time-varying parameters; Markov- switching models (search for similar items in EconPapers)
JEL-codes: E H (search for similar items in EconPapers)
Pages: 27 pages
Date: 2017
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