Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS

Gabriella Legrenzi () and Costas Milas

Working Paper series from Rimini Centre for Economic Analysis

Abstract: We extend previous work on the sustainability of the government's intertemporal budget constraint by allowing for non-linear adjustment of the fiscal variables, conditional on (i) the sign of budgetary disequilibria and (ii) the phase of the economic cycle. Further, our endogenously estimated threshold for the non-linear adjustment is not fixed; instead it is allowed to vary over time and during financial crises. Our analysis presents particular interest within the current economic scenario of financial crises, poor growth and debt crises. Our empirical analysis, applied to the GIPS, shows evidence of a threshold behaviour for the GIPS, that only correct "large" unbalances, which, in the case of Greece and Portugal, are higher than the EGSP criteria. Financial crises further relax the threshold for adjustment: during financial crises, only "very large" budgetary unbalances are corrected.

Keywords: debt sustainability; fiscal adjustment; nonlinear models (search for similar items in EconPapers)
JEL-codes: C22 H20 H60 H63 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:54_12

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