Risk Assessment Under A Nonlinear Fiscal Policy Rule

Christos Shiamptanis

LCERPA Working Papers from Laurier Centre for Economic Research and Policy Analysis

Abstract: In the aftermath of the recent debt crisis, many countries are implementing nonlinear fiscal policy rules, whereby the government’s responsiveness to debt must strengthen at higher levels of debt. This paper examines how a nonlinear fiscal policy rule affects the possibility of future insolvency in a small open economy. We find that (1) the criteria for a nonlinear fiscal rule to eliminate explosive behavior should be tighter than the ones proposed by Bohn (1998); (2) a country that adopts a nonlinear fiscal rule could substantially reduce the probability of a solvency crisis; (3) a nonlinear fiscal rule allows a country to reduce the possibility of insolvency without large initial responsiveness.

Keywords: Nonlinear fiscal rule; Fiscal Sustainability; Solvency Crisis; Policy Switching; Canada (search for similar items in EconPapers)
JEL-codes: C63 E62 E63 F34 H63 (search for similar items in EconPapers)
Pages: 45
Date: 2014-02, Revised 2014-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: RISK ASSESSMENT UNDER A NONLINEAR FISCAL POLICY RULE (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:wlu:lcerpa:lm0063

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