Type
Working paper
Title
Why fiscal regimes matter for fiscal sustainability analysis: an application to France
Author(s)
Editor
Paris : OFCE
Collection
Working paperl de l'OFCE : 2016-15
Keywords
Fiscal rules, Fiscal regimes, Public debt sustainability, Time varying parameters, Markov switching models
Abstract
EN
This paper introduces a Regime-Switching Model-Based Sustainability test allowing for periodic (or local) violations of Bohn (1998, QJE)’s sustainability condition. We assume a Markov-switching fiscal policy rule whose parameters stochastically switch between sustainable and unsustainable regimes. We demonstrate that long-run fiscal sustainability not only depends on regime-specific feedback coefficients of the fiscal policy rule but also on the average durations of fiscal regimes. Evidence on French data suggests that the No-Ponzi game condition weakly holds in the long run, when accounting for regime switches. Accounting for a potential fiscal limit, we test whether estimated Markov-switching fiscal policy rule fulfills a debt-stabilizing condition depending on two measures of the interest rate on public debt. With the average apparent rate, fiscal data rejects the null hypothesis of an explosive public debt-to-GDP ratio. Still, we are unable to reject it using the average market rate, thus suggesting unstable dynamics of the public debt-to-GDP ratio.
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