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Fiscal reaction functions for the advanced economies revisited

Author

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  • Francesca Di Iorio

    (University of Naples Federico II)

  • Stefano Fachin

    ("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.

Suggested Citation

  • Francesca Di Iorio & Stefano Fachin, 2019. "Fiscal reaction functions for the advanced economies revisited," DSS Empirical Economics and Econometrics Working Papers Series 2019/1, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    • Handle: RePEc:sas:wpaper:20191
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    Cited by:

    1. António Afonso & José Alves & José Carlos Coelho, 2023. "Determinants of the degree of fiscal sustainability," Working Papers REM 2023/0255, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. António Afonso & José Carlos Coelho, 2024. "Budgetary Constrained Governments: Drivers of Time Varying Fiscal Sustainability in OECD Countries," CESifo Working Paper Series 11137, CESifo.

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    More about this item

    Keywords

    Public Debt; Fiscal Reaction Function; Panel cointegration; Cointegrating Polynomial Regression; Spread.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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