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

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