Estimating Prudent Budgetary Margins for 11 EU Countries: A Simulated SVAR Model Approach
45 Pages Posted: 5 Oct 1999
Date Written: June 25, 1999
Abstract
In this paper, a structural VAR model is estimated for 11 EU countries in order to assess the effect on the government deficit ratio of four independent economic disturbances: supply, fiscal, real private demand and monetary shocks. Based on the estimated distribution of these shocks, stochastic simulations are performed to derive estimates of cyclically-adjusted budget balances that would have to be maintained to avoid breaching the Stability and Growth Pact's 3 per cent of GDP deficit limit over different time horizons and with varying degrees of confidence. In order to capture the movement in the deficit stemming from automatic stabilisation, fiscal policy shocks are turned off during the simulations. The results suggest that, for the majority of countries, if governments were to aim for a cyclically-adjusted budget deficit between 1.0 and 1.5 per cent of GDP, the actual deficit would, with a 90 per cent likelihood, remain within the 3 per cent limit over a three-year horizon, without the need to adjust fiscal policy in a pro-cyclical fashion. This horizon would be extended to between five and seven years if governments opted for a "close-to-balance" budget rule, defined as a cyclically-adjusted deficit between zero and 1 per cent of GDP. The findings also indicate that the medium-term deficit targets -- as set out in the individual countries' Stability programmes (for Euro area countries) and Convergence programmes (for non-euro countries) -- submitted to the European Council appear to be overall prudent, at least with respect to a three-year horizon. If longer horizons are considered, however, it may be desirable for the four largest EU countries and Austria to tighten their medium-term budget objectives.
JEL Classification: H60, H62, C33
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Optimal Supervisory Policies and Depositor-Preference Laws
By Henri Pagès and João A. C. Santos
-
Declining Valuations and Equilibrium Bidding Central Bank Refinancing Operations
By Christian Ewerhart, Nuno Cassola, ...
-
Fiscal Policy in the Transition to Monetary Union: A Structural VAR Model
-
Testing for Zeros in the Spectrum of an Univariate Stationary Process: Part I
-
The Tail Behavior of Stock Returns: Emerging Versus Mature Markets
By Eric Jondeau and Michael Rockinger
-
Inflation and the Markup in the Euro Area
By Catherine Bruneau, Olivier De Bandt, ...
-
Forecasting Inflation in the Euro Area
By Catherine Bruneau, Olivier De Bandt, ...
-
Long-Run Causality, with an Application to International Links between Long-Term Interest Rates
By Catherine Bruneau and Eric Jondeau
-
Assessing GMM Estimates of the Federal Reserve Reaction Function
By Clementine Florens, Eric Jondeau, ...