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Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland

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  • Hjelm, Göran

    (Department of Economics, Lund University)

  • Johansson, Martin W

    (Department of Economics, Lund University)

Abstract

Instead of relying on descriptive statistics to evaluate the permanence of a fiscal contraction, this paper suggests that this issue should be studied using tests for structural breaks in cointegrating relationships between taxes and spending. We label a fiscal contraction as 'permanent' if a structural break is detected during the contraction period. Applying Gregory and Hansen's (1996) test on Danish and Irish data and find that the fiscal contraction in Ireland (1987-1989) induced a structural change in fiscal policy while the results from the Danish data do not imply such a regime shift. We discuss possible explanations for this finding

Suggested Citation

  • Hjelm, Göran & Johansson, Martin W, 2002. "Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland," Working Papers 2002:11, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2002_011
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    References listed on IDEAS

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    3. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Sanjeev Gupta & Emanuele Baldacci & Benedict Clements & Erwin R. Tiongson, 2005. "What sustains fiscal consolidations in emerging market countries?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 307-321.
    2. Julia Darby & V. Anton Muscatelli & Graeme Roy, 2005. "Fiscal consolidation and decentralisation: a tale of two tiers," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 169-195, June.

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    More about this item

    Keywords

    Fiscal Policy; Fiscal contraction; Cointegration; Structural breaks;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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