Fiscal Fatigue and Debt Sustainability: Empirical Evidence from the Eurozone 1980-2013

21 Pages Posted: 4 Feb 2016

Date Written: January 2016

Abstract

Fiscal fatigue may lead a country to stop adjusting when debt continues rising in spite of a prolonged fiscal adjustment. Once fiscal fatigue sets in, the country may stop adjusting, thus compromising debt sustainability. However, the absence of sufficient adjustment may be the consequence of governments implementing delayed adjustment as a result of the domestic policy-making process. This paper investigates the factors that will lead to delayed adjustment instead of fiscal fatigue in the face of rising debt. Strong institutions and underlying macroeconomic conditions can be useful in averting the fiscal fatigue, and lead to an improvement in the fiscal balance once the debt limit has been reached.

Keywords: debt sustainability, fiscal fatigue, institutions, debt limit

JEL Classification: E62, H3, H63

Suggested Citation

Echevarria-Icaza, Victor, Fiscal Fatigue and Debt Sustainability: Empirical Evidence from the Eurozone 1980-2013 (January 2016). Available at SSRN: https://ssrn.com/abstract=2727649 or http://dx.doi.org/10.2139/ssrn.2727649

Victor Echevarria-Icaza (Contact Author)

Universidad Complutense de Madrid (UCM) ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain

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