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Fiscal reaction functions for the advanced economies revisited

Francesca Di Iorio and Stefano Fachin ()

No 2019/1, DSS Empirical Economics and Econometrics Working Papers Series from Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome

Abstract: We revisit the evidence on the relationship between the Primary Balances/GDP and Debt/GDP ratios (Fiscal Reaction Function, FRF), in the advanced economies, showing that taking carefully into account the stochastic properties of the data leads to question the validity of the current consensus. More precisely, we find that before the 2008 financial crisis long-run FRF's existed only in a small number of advanced economies, and that they were more likely in countries characterized by higher sovereign spreads. Finally, we also find limited evidence of non-linearities leading to fiscal fatigue.

Keywords: Public Debt; Fiscal Reaction Function; Panel cointegration; Cointegrating Polynomial Regression; Spread. (search for similar items in EconPapers)
JEL-codes: C23 C32 E62 H62 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2019-01
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