Policy mix and debt sustainability: evidence from fiscal policy rules

This paper characterizes rules-based fiscal policy setting for G-3 and large EMS countries. We set up a simple fiscal policy rule and then infer on the policymakers' reaction coefficients by testing with GMM. Our results qualify existing evidence on systematic fiscal policy in two respects. Fir...

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Bibliographic Details
Published inEmpirica Vol. 33; no. 2; pp. 89 - 112
Main Author Claeys, Peter
Format Journal Article
LanguageEnglish
Published New York Springer 01.01.2006
Springer Nature B.V
SeriesEmpirica
Subjects
Budget economics
Budgets
Debt
Debt sustainability
E61
E63
Economic and Monetary Union
Economic development
Economic growth
Economic theory
Europe
Fiscal policy
GDP
Generalized method of moments
Gross Domestic Product
Model testing
Monetary policy
Policy interaction and policy rules
Political economy
Politics
Public debt
Studies
Sustainability
Sustainable development
Variables
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Summary:This paper characterizes rules-based fiscal policy setting for G-3 and large EMS countries. We set up a simple fiscal policy rule and then infer on the policymakers' reaction coefficients by testing with GMM. Our results qualify existing evidence on systematic fiscal policy in two respects. First, fiscal policy usually stabilizes public debt; and there is indeed substantial interaction between fiscal and monetary policies via the policy mix or the debt channel. Second, sustainability is achieved with a "stop-go" cycle of consolidation. Unless debt ratios are high, consolidation does not come at the cost of less cyclical stabilization. [PUBLICATION ABSTRACT]
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0340-8744
1573-6911
DOI:10.1007/s10663-006-9009-9