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Assessing the fiscal stance in the European Union and the United States, 1970-2011

Polito, Vito and Wickens, Michael ORCID: https://orcid.org/0000-0002-6862-0674 2011. Assessing the fiscal stance in the European Union and the United States, 1970-2011. Economic Policy 26 (68) , pp. 599-647. 10.1111/j.1468-0327.2011.00270.x

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Abstract

The huge increases in debt-GDP ratios following the 2007–2009 global financial crisis, which are unprecedented except in times of war, has focused attention on the viability of the fiscal positions of EU countries and the US, how to assess this and the likely future evolution of these positions. This paper proposes an indicator of the fiscal stance which computes the fiscal adjustment required to reach a specific debt-GDP targeted given the forecasts of future deficit and interest rates obtained from an unrestricted (recursively-estimated) VAR model. The index is easy to compute and can be decomposed to disclose the different contribution of revenue, expenditure, nominal yields, inflation and growth to the fiscal stance. For this reason it provides a transparent and detailed measure of the fiscal stance, particularly suitable for multi-country surveillance. As a result, the index improves on the tax-gap indicators widely used by governments and international agencies, and is far more informative than formal econometric tests of fiscal sustainability. The time series of the indicator for individual EU countries and the US show that their fiscal position has fluctuated considerably over the last 40 years, and has particularly deteriorated since 2007. The index predicts that the adjustment required to restore pre-crisis debt-GDP levels are higher for high debt countries like Greece, Italy and Portugal. They become more severe the shorter is the time horizon for the adjustment. As a large degree of uncertainty surrounds the assessment of the fiscal stance in the medium and long run, we argue that policy makers should inform their policy based on the worst case scenario predicted by the indicator.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance
J Political Science > JZ International relations
Publisher: Wiley Blackwell
ISSN: 0266-4658
Last Modified: 18 Oct 2022 14:31
URI: https://orca.cardiff.ac.uk/id/eprint/17834

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