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A model-based indicator of the fiscal stance

Polito, Vito and Wickens, Michael 2012. A model-based indicator of the fiscal stance. European Economic Review 56 (3) , pp. 526-551. 10.1016/j.euroecorev.2011.12.003

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Abstract

We argue that the conventional approach to assessing the fiscal stance based on econometric tests of the government present value budget constraint (PVBC) is of limited practical use. We propose an alternative measure that focuses on short-run fluctuations in the fiscal stance, namely, a model-based indicator that compares a target level of the debt-GDP ratio at a given point in the future with a forecast based on the government budget constraint (GBC) where the forecasts are obtained using a recursively estimated VAR. By log-linearising the GBC the index can be decomposed into the various different components of which it is comprised. Using data from 1970 to 2011 we conduct a detailed time-series study of the fiscal stances of four countries: the United States, the United Kingdom, Germany and Greece and we calculate the index for 11 other EU countries. For most countries the index shows that their fiscal stances vary from being too loose to too tight. Almost without exception the index drops sharply from 2007 showing the harmful effect on their fiscal stances of the recent recession.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Uncontrolled Keywords: Budget deficits; Government debt; Fiscal sustainability; VAR analysis; Economic policy
Publisher: Elsevier
ISSN: 0014-2921
Last Modified: 04 Jun 2017 04:26
URI: http://orca-mwe.cf.ac.uk/id/eprint/39068

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