Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS

31 Pages Posted: 21 Nov 2012

See all articles by Gabriella Deborah Legrenzi

Gabriella Deborah Legrenzi

Keele University - Department of Economics

Costas Milas

Keele University; Brunel University London - Economics and Finance

Date Written: November 21, 2012

Abstract

We extend previous work on the sustainability of the government’s intertemporal budget constraint by allowing for non-linear adjustment of the fiscal variables, conditional on the sign of budgetary disequilibria and the phase of the economic cycle. Further, our endogenously estimated threshold for the non-linear adjustment is not fixed; instead it is allowed to vary over time and during financial crises. Our analysis presents particular interest within the current economic scenario of financial crises, poor growth and debt crises. Our empirical analysis, applied to the GIPS, shows evidence of a threshold behaviour for the GIPS, that only correct 'large' unbalances, which, in the case of Greece and Portugal, are higher than the EGSP criteria. Financial crises further relax the threshold for adjustment: during financial crises, only 'very large' budgetary unbalances are corrected.

Keywords: debt sustainability, fiscal adjustment, nonlinear models

JEL Classification: H630, H200, H600, C220

Suggested Citation

Legrenzi, Gabriella Deborah and Milas, Costas, Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS (November 21, 2012). CESifo Working Paper Series No. 4001, Available at SSRN: https://ssrn.com/abstract=2178964 or http://dx.doi.org/10.2139/ssrn.2178964

Gabriella Deborah Legrenzi (Contact Author)

Keele University - Department of Economics ( email )

ST5 5BG Staffordshire, Staffs, ST5 5BG
United Kingdom

Costas Milas

Keele University ( email )

Keele, Staffordshire ST5 5BG
United Kingdom

Brunel University London - Economics and Finance ( email )

Uxbridge
Middlesex UB8 3PH
United Kingdom
0044 1895 816268 (Phone)
0044 1895 203384 (Fax)

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