fiscal shocks and budget balance persistence in the eu countries from central and eastern europe this article analyses the time series properties of the fiscal balance in the 10 eu countries from central and eastern europe the persistence of the fiscal balance is analysed by means of unit root tests that account for possible nonlinearities and structural changes the linear and nonlinear unit root tests find only mild evidence in favour of the stationarity hypothesis with asymmetric effects present in a few cases after controlling for structural changes in the data generation processes dgps the results point to stationarity of the series thus in spite of relatively steady headline figures the budget balance processes in the eu countries from central and eastern europe exhibit substantial instability

fighting multiple tax havens this paper develops a competition theory framework that evaluates an important aspect of the oecd s harmful tax practices initiative against tax havens we show that the sequential nature of the process is harmful and more costly than a big bang multilateral agreement the sequentiality may even prevent the process from being completed successfully closing down a subset of tax havens reduces competition among the havens that remain active this makes their tax haven business more profitable and shifts a larger share of rents to these remaining tax havens making them more reluctant to give up their tax haven business moreover the outcome of this process reducing the number of tax havens but not eliminating them altogether may reduce welfare in the oecd

a model based indicator of the fiscal stance we argue that the conventional approach to assessing the fiscal stance based on econometric tests of the government present value budget constraint pvbc is of limited practical use we propose an alternative measure that focuses on short run fluctuations in the fiscal stance namely a model based indicator that compares a target level of the debt gdp ratio at a given point in the future with a forecast based on the government budget constraint gbc where the forecasts are obtained using a recursively estimated var by log linearising the gbc the index can be decomposed into the various different components of which it is comprised using data from 1970 to 2011 we conduct a detailed time series study of the fiscal stances of four countries the united states the united kingdom germany and greece and we calculate the index for 11 other eu countries for most countries the index shows that their fiscal stances vary from being too loose to too tight almost without exception the index drops sharply from 2007 showing the harmful effect on their fiscal stances of the recent recession

sustainability of current account deficits in india an intertemporal perspective this study examines the sustainability of current account deficits cads and the validity of intertemporal budget constraint ibc in india the long run model is estimated on annual data for the period 1950 1951 to 2009 2010 the optimal single equation and maximum likelihood ml system estimates of the model provide a consistent support for the long run relationship between imports and exports the olsgh estimates provide no support and that ml system estimates a consistent support for cointegration in both the models estimated with one and two structural breaks in level the new cointegration breakdown tests generally suggest that the cointegration prevails from 1951 to 2010 the evidence supporting the cointegration between imports and exports overwhelms the evidence providing a mixed or no support for cointegration the estimates of slope parameter above zero and the dominant support for cointegration between imports and exports vindicate the validity of ibc and the sustainability of cads the shor

capital mobility and foreign debt sustainabilty some evidence from turkey this paper address the extent of capital mobility and foreign debt sustainability in turkey over the 1962 2003 period by examining the relationship between saving and investment and imports and exports respectively the empirical investment is based on cointegration error correction models and threshold and momentum threshold autoregressive models our findings are consistent with the existence of capital mobility and the strong form of foreign debt sustainability

testing intertemporal budget constraints theory and applications to u s federal budget and current account deficits this paper extends previous tests of intertemporal budget balance and present value relationships by expanding the set of allowable deficit processes and by deriving a testable condition that is sufficient to ensure intertemporal budget balance as long as the expected discount rate is strictly positive using these tests the authors find that both the postwar federal budget deficit process and the process governing accumulation of u s assets by foreigners are consistent with intertemporal budget balance copyright 1991 by ohio state university press

tax motivated transfer pricing and us intrafirm trade prices abstract this paper analyzes monthly data on us international trade prices between 1997 and 1999 in order to investigate the impact of tax influences on intrafirm trade prices results indicate that there is substantial evidence of tax motivated transfer pricing in us intrafirm trade prices there is a strong and statistically significant relationship between countries tax rates and the prices of intrafirm transactions controlling for other variables that affect trade prices as country tax rates are lower us intrafirm export prices are lower and us intrafirm import prices are higher this finding is consistent with theoretical predictions regarding tax motivated income shifting behavior

global imbalances and the intertemporal external budget constraint a multicointegration approach abstract this paper analyzes the external solvency of a group of 23 oecd countries for the period 1970 2012 the empirical strategy adopted underlines the increasing importance of the financial channel for the external adjustment as proposed in gourinchas and rey 2007 we unify the traditional approaches to testing for external sustainability considering the stock flow system created by the variables representing the external relationships of an open economy external sustainability is tested using several types of cointegration and multicointegration tests the results obtained point to weak sustainability in the flows analysis whereas some degree of strong sustainability is found for up to six countries in the stock flow approach among these countries we find both non european economies such as japan and new zealand and euro area members especially those with more restricted access to financing in the international markets

pushing the limit fiscal policy in the european monetary union abstract governments are confronted with the growing realization that they face fiscal limits on the size of debt and deficits relative to gdp these fiscal limits invalidate bohn s criterion for fiscal sustainability which allows explosive debt relative to gdp eventually violating any fiscal limit we derive restrictions on a fiscal rule necessary for the government to eliminate explosive behavior these restrictions require that the response of the primary surplus to debt be relatively strong and that the primary surplus be cointegrated with both debt and output we test these empirical implications for a panel of eleven emu countries and find that they are satisfied implying that fiscal policy does not create explosive behavior

are corporate tax rates or countries converging abstract the statutory rate and effective tax rate imposed on corporation income as well as the dispersion of these rates began to decline in the 1980s is this due to changes in the domestic determinants of corporate taxation or increases in international pressures for tax competition this paper finds clear evidence that the corporate tax rate is insulated from a country s revenue needs across countries there is no association of the expenditure gdp ratio with the corporate statutory rate and only weak evidence of a positive association with the average rate there is suggestive but not definitive evidence that the domestic role of the corporate tax as a backstop to the individual income tax is important across countries there is indeed a strong association between the top individual rate and the top statutory corporate rate there is intriguing evidence about the role of international competitive pressures on corporate taxation measures of openness are negatively associated with statutory corporate rates although not with revenues collected as a fraction of gdp strikingly larger more trade intensive countries do collect more corporate tax but this may be because these countries are more attractive venues for investment

periodically expanding discounted debt a threat to fiscal policy sustainability this paper models the behaviour of discounted us debt using a markov switching time series model the significance of modelling fiscal policy within this framework derives from the implications it has for long term sustainability the two regime framework used in this paper identifies periods where the present value of us federal debt is expanding versus periods when it is collapsing using an updated data series from hamilton and flavin 1986 a test is conducted to establish if the expanding periods pose a threat to the long run sustainability of fiscal policy for the usa it is found that they do not copyright 2005 john wiley sons ltd

assessing long term fiscal developments a new approach abstract we use a new approach to assess long term fiscal developments by analyzing the time varying behaviour of the two components of government spending and revenue responsiveness and persistence a feature not captured by automatic stabilisers we are able to infer about the sources of fiscal deterioration improvement drawing on quarterly data we estimate recursively these components within a system of government revenue and spending equations using a three stage least square method for eight european union countries plus the us the results suggest that significant changes in the fiscal stance including those related to the current crisis are reflected in the estimates of persistence and responsiveness

fiscal paradise foreign tax havens and american business the tax haven affiliates of american corporations account for more than 20 percent of u s foreign direct investment and nearly a third of the foreign profits of u s firms american companies report extraordinarily high profit rates on their tax haven investments in 1982 this behavior implies that the revenue maximizing tax rate for a typical haven is around 5 8 percent american and foreign investment in tax havens has an uncertain effect on u s tax revenue but since low tax rates encourage american companies to shift profits out of high tax foreign countries it is possible that low foreign tax rates ultimately enhance u s tax collections

public debt in turkey evaluation and perspectives the aim of this study is to analyse past and future sustainability of total public debt in turkey the analysis is based on econometric studies and simulations the data are taken quarterly in order to take into account intra annual effects important in turkey given the strong volatility of the economy the period covered is 1988 to 2002 the econometric analysis rejects the hypothesis of the sustainability of turkish public debt in the last 15 years the simulations show that to reach an acceptable level of debt turkey has to solve its problem of chronic inflation stabilize its economy and adopt either a policy freezing public spending or a very active fiscal policy

the role of intergovernmental aid in defining fiscal sustainability at the sub national level the concept of fiscal sustainability has become increasingly used over the last 20 years however much of the literature on fiscal sustainability at the sub national level ignores the role of intergovernmental fiscal relations to address this gap this paper discusses a sufficient condition for sub national fiscal sustainability and examines the importance of intergovernmental aid in determining that sustainability using panel data of counties and municipalities in the us and using unit root and cointegration analytic techniques this paper finds different levels of fiscal sustainability between counties and municipalities we also find that intergovernmental aid plays an important role for fiscal sustainability for both counties and municipalities

consumption smoothing and the current account evidence for france 1970 1996 abstract this paper estimates a simple consumption smoothing model of the french current account and examines its capacity to predict recent developments in france s external performance the model views the current account as a buffer through which private agents can smooth consumption over time in response to temporary disturbances to output investment and government expenditure the empirical results indicate that the model performs well overall and predicts correctly the sharp turnaround in france s external accounts observed in the past 3 years a feature of the data that conventional models of trade flows based on income and relative price variables appear unable to explain

deficits government expenditures and tax smoothing in the united states 1929 1988 abstract barro s tax smoothing hypothesis tsh implies that the government runs a budget deficit whenever it anticipates the growth rate of national income to increase or the growth rate of its expenditure to decline we test this implication of the hypothesis by examining the implied cross equation restrictions on a vector autoregression var model using u s data for the period ranging from 1929 to 1988 our formal tests reject the hypothesis for the full sample period but cannot reject it for the post 1947 period further investigations show that the statistical rejection should be attributed to sharp differences in the statistical properties of the pre 1947 and the post 1947 data rather than the failure of the hypothesis itself

taxing across borders tracking personal wealth and corporate profits globalization is making it increasingly easy for corporations to shift profits to low tax countries modern technology has also made it simpler for wealthy individuals to move funds to undeclared bank accounts in offshore tax havens both issues have featured prominently in the news and global economic debates since the financial crisis but the arguments tend to be based on relatively little empirical evidence measuring the costs of tax havens to foreign governments is fraught with difficulties however balance of payments data and corporate filings show that us companies are shifting profits to bermuda luxembourg and similar countries on a large and growing scale about 20 percent of all us corporate profits are now booked in such havens a tenfold increase since the 1980s this profit shifting is typically done within the letter of the law and thus would be best described as tax avoidance rather than fraud i attempt to quantify its cost for government coffers by taking a fresh look at the most recent macroeconomic evidence and combining it in a systematic manner over the last 15 years the effective corporate tax rate of us companies has declined from 30 to 20 percent and about two thirds of this decline can be attributed to increased profit shifting to low tax jurisdictions wealthy individuals too use tax havens sometimes legally to benefit from banking services not available in their home country and sometimes illegally to evade taxes a number of changes have sought with some success to curb that form of tax evasion over the last years yet the available evidence from switzerland and

are the current account imbalances between emu countries sustainable evidence from parametric and non parametric tests summary using parametric and non parametric estimation techniques we analyze the sustainability of the recently growing current account imbalances in the euro area and test whether the european monetary union has aggravated these imbalances two alternative criteria for the assessment of external debt sustainability are considered one based on the transversality condition of intertemporal optimization and the other based on the stationarity properties of the stochastic process of the debt gdp ratio econometric sustainability tests are performed using the pooled mean group estimator and panel unit root tests respectively variants of both test procedures with varying coefficients using penalized splines estimation are applied we find empirical evidence suggesting that the introduction of the euro is associated with a regime shift from sustainability to unsustainability of external debt accumulation for the euro area copyright 2012 john wiley sons ltd

public sector debt dynamics the persistence and sources of shocks to debt in 10 eu countries this paper characterises the time series properties of debt gdp ratios in ten eu countries over the period 1982 2009 it establishes that shocks to debt ratios persist and measures the size and source of the permanent effects of shocks as they evolve over time the analysis shows that debt dynamics in the eu10 are complicated involving important inter country interactions and protracted adjustment periods of the order of ten years we find evidence of asymmetries in the effects of different forms of fiscal consolidation with unanticipated reductions in government spending having a more permanent effect than unanticipated increases in government revenue unanticipated business cycle fluctuations also have important long term effects on the ratio

credit constraints and the current account a test for the japanese economy abstract this paper constructs a small open economy version of the kiyotaki and moore 1997 credit cycles journal of political economy 105 2 211 248 model along the line developed by kasa 1998 borrowing constraints and asset market dynamics evidence from pacific basin federal reserve bank of san francisco economic review 3 17 28 and derives a closed form solution of the current account dynamics using the solution a null hypothesis of no credit constraints is tested for the japanese economy the empirical results show that the null hypothesis is strongly rejected and that the estimated signs of the parameters are consistent with the model the kiyotaki and moore model would give an adequate description of the japanese economy

in praise of tax havens international tax planning and foreign direct investment abstract the multinationalization of corporate investment in recent years has given rise to a number of international tax avoidance schemes that may be eroding tax revenues in industrialized countries but which may also reduce tax burdens on mobile capital and so facilitate investment both the welfare effects of and the optimal response to international tax planning are therefore ambiguous evaluating these factors in a simple general equilibrium model we find that citizens of high tax countries benefit from some tax planning paradoxically if tax rates are not too high an increase in tax planning activity causes a rise in optimal corporate tax rates and a decline in multinational investment thus fears of a race to the bottom in corporate tax rates may be misplaced

international intertemporal solvency in industrialized countries evidence and implications recent large current account deficits among industrialized countries have caused concern for policy makers some believe for example that the current buildup of claims on the u s by foreigners violates her solvency condition with respect to the rest of the world recent research 22 suggests that for a country s intertemporal solvency condition to hold the change in the country s obligations to the rest of the world i e her current account deficit must be stationary stationarity tests on current accounts were performed for the u s by trehan and walsh 22 and wickens and uctum 23 for the u s and canada by otto 15 and for twenty three countries by gundlach and sinn 10 these papers present evidence that current accounts are non stationary for several major industrialized countries including the u s the u k canada germany and japan these findings do not favor international intertemporal solvency for this reason the issue merits further investigation in this paper we test for the stationarity of current account deficits of the group of seven industrialized countries preliminary results confirm many of gundlach and sinn s 10 findings however several events during the 1980s might have caused discrete breaks in current account balances events potentially linked with current account breaks include the reduction in world inflation tax reduction and reform in the u s and other industrialized countries attempts at international macroeconomic coordination i e the plaza accord and shifts in the after tax rate of return on capital in many countries as shown in recent research on gross national product 16 2 if such breaks are not accounted for stationarity tests will be biased in favor of accepting the null hypothesis of non stationarity our results suggest strong evidence of discrete breaks in the u s and japan and some evidence favoring breaks in the u k germany and canada the break in the u s current account appears to occur in 1983 while breaks in the other countries appear to occur somewhat later between late 1984 and 1987 more importantly once these breaks are incorporated the evidence is more favorable toward the stationarity of current accounts in these countries these findings thus support intertemporal solvency for these countries

intertemporal solvency and indexed debt evidence from brazil 1976 1991 abstract this paper examines domestically held government debt financial indexation inflation and intertemporal solvency in brazil an error correction model is used to examine the temporal causality of expenditures taxation and real indexation evidence shows that for the 1986 1991 period reductions in real indexation followed increases in government spending such reductions while generally associated with anti inflation plans served as implicit defaults the policy was largely unrelated to foreign factors of course such a policy cannot be sustained in the long run accordingly brazil recently ended backward looking financial indexation

sustainability of the deficit process with structural shifts this article discusses the condition for deficit sustainability and searches for shifts in the structure of u s deficit policy i show that contrary to the current literature cointegration between revenues and expenditures inclusive of debt payment is not a necessary but a sufficient condition for a strict interpretation of deficit sustainability the necessary condition requires that debt grow slower than the borrowing rate for tests on structural shifts i use a test for structural change that searches for shifts in the rank of the cointegrating matrix i find that there is a shift in deficit policy in the early 80s so that cointegration between revenue and expenditure inclusive of interest payments holds only up to 1980 i show however that the deficit process is still sustainable despite the failure of cointegration in the 80s the finding of shifts in the deficit process is more uncertain when i normalize by gross national product or population but the deficit is shown to be sustainable regard

tax competition with heterogeneous capital mobility in this paper we look at corporate fiscal policies set by two competing regions in an environment where firms are heterogonous regarding to their mobility costs we show that if regions are allow to tax domestic and foreign capital at different rates they will offer a preferential treatment to foreign firms even if mobility costs are symmetrically distributed across regions preventing such type of preferential treatment raises revenues for both regions unless there exist a high density of firms with low moving costs because preferential tax treatment promotes firms movement for fiscal raisons such tax regime always generates more social loss due to unnecessary delocalization we also investigate the effect of heterogeneity among regions

us deficit sustainability revisited a multiple structural change approach in this article we re examine the long run sustainability of us budget deficits using bai and perron s multiple structural change approach while the deficit would have been weakly sustainable over the full sample 1947 1 2005 3 strong sustainability would appear only between january 1982 and february 1996

valuation effects and the dynamics of net external assets abstract valuation effects can imply that the traditional current account is an inaccurate measure of the change in the net foreign asset nfa position this paper uses new developments in the analysis of portfolio choice in general equilibrium to investigate valuation effects in a two country model broadly speaking the valuation effects in the model correspond to those observed in the data but there is a key distinction between unanticipated and anticipated valuation effects unanticipated effects can be large dominating the movement in nfa but anticipated effects arise only at higher orders of approximation and are small for reasonable parameterizations

net foreign assets and international adjustment the united states japan and germany abstract this paper examines external adjustment in the usa japan and germany from the perspective of net foreign asset positions it asks two questions what are in the long run the determinants of net foreign asset equilibrium what are in the short run some of the adjustment mechanisms sustaining that equilibrium an analysis of post war data produces two insights first using a cointegration approach the existence of long run net foreign asset equilibrium can be identified it is a function of demographic variables and public debt second deviations from long run equilibrium give rise to feedback through different components of domestic absorption in the three countries

fiscal risk in a monetary union diverse fiscal policies which are subject to fiscal limits and stochastic shocks can threaten price stability in a monetary union the fiscal limits arise due to distortionary taxation and political will stochastic shocks are random and could push a fiscally sound policy towards its limit in equilibrium agents refuse to lend along a path which violates the fiscal limits creating a crisis the crisis requires a policy response to restore lending we focus on two responses default and policy switching both of which must be designed to restore fiscal solvency under the assumption that agents know the policy response we show that default poses no risk to price stability but that policy switching does we simulate the model to quantify fiscal risk in the european monetary union with fiscal variables at end of 2009 values we find that the probability of a fiscal crisis in greece and italy countries whose debt relative to gdp had strayed far above the 60 percent limit is positive but small however a small increase in debt can lead to a large increase in risk

a century of current account dynamics abstract recent globalization trends have refocused attention on the historical evolution of international capital mobility over the long run the issue is examined here using time series analysis of current account dynamics for fifteen countries since circa 1850 the inter war period emerges as an era of low capital mobility and only recently can we observe a tentative return to the degree of capital mobility witnessed during the late nineteenth century the analysis of saving and investment dynamics also helps make sense of the frequently observed high correlation of saving and investment rates in historical data

is the greek budget deficit sustainable after all empirical evidence accounting for regime shifts this article re examines the sustainability of the greek budget deficit by using a formal framework based on the government s intertemporal budget constraint the empirical analysis uses annual data from 1960 to 2011 and employs traditional as well as more recent unit root and cointegration techniques that account for linear and nonlinear effects in fiscal policy actions unlike previous studies the evidence suggests that allowing for structural breaks the greek budget deficit is unsustainable the parameter after the second detected break reflects the structural deficiencies of the greek economy

how to assess debt sustainability some theory and empirical evidence for selected euro area countries in this article we elaborate on the test proposed by bohn 1998 that suggests to study whether the primary surplus relative to gross domestic product gdp is a positive function of the public debt to gdp ratio in order to detect whether debt policies are sustainable we argue that this should be complemented by additional tests for countries with rising debt to gdp ratios we then apply that test to some countries of the euro area in addition we perform stationarity tests with respect to the real deficit inclusive of interest payments in order to gain additional insight we conclude that there is empirical evidence that the chosen paths of fiscal policies are sustainable for the countries we consider although there are country specific differences in debt policies

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

do fiscal variables affect fiscal expectations experiments with real world and lab data we generate observable expectations about fiscal variables through laboratory experiments using real world data from several european countries as stimuli we compare a var model of expectations for data which is presented in a fiscal frame with one for neutrally presented data we measure the degree to which participants use fiscal data for their forecasts agents expectations are found neither to be consistent with rational nor with purely adaptive expectations but instead follow an augmented adaptive scheme methodological implications of the present approach for experiments in macroeconomics are also discussed

why pay more corporate tax avoidance through transfer pricing in oecd countries this paper presents suggestive evidence of income shifting in response to differences in corporate tax rates for a large selection of oecd countries we use a new method to disentangle the income shifting effects from the effects of tax rates on real activity our baseline estimates suggest that a substantial share of the revenues from a unilateral increase in the corporate tax rate is lost because of a decline in reported income

fiscal deficit sustainability of the spanish regions carrion i silvestre j l fiscal deficit sustainability of the spanish regions regional studies the fiscal deficit of the spanish autonomous communities is investigated using non stationary panel data analysis the paper considers the two main approaches in the literature first assessing whether there is a long run relationship between the revenues and expenditures of the autonomous communities and second focusing on the use of fiscal rules the paper shows that it is possible to relate these approaches in a unified framework

assessing the fiscal stance in the european union and the united states 1970 2011 the huge increases in debt gdp ratios following the 2007 2009 global financial crisis which are unprecedented except in times of war has focused attention on the viability of the fiscal positions of eu countries and the us how to assess this and the likely future evolution of these positions this paper proposes an indicator of the fiscal stance which computes the fiscal adjustment required to reach a specific debt gdp targeted given the forecasts of future deficit and interest rates obtained from an unrestricted recursively estimated var model the index is easy to compute and can be decomposed to disclose the different contribution of revenue expenditure nominal yields inflation and growth to the fiscal stance for this reason it provides a transparent and detailed measure of the fiscal stance particularly suitable for multi country surveillance as a result the index improves on the tax gap indicators widely used by governments and international agencies and is far more informative than formal econometric tests of fiscal sustainability the time series of the indicator for individual eu countries and the us show that their fiscal position has fluctuated considerably over the last 40 years and has particularly deteriorated since 2007 the index predicts that the adjustment required to restore pre crisis debt gdp levels are higher for high debt countries like greece italy and portugal they become more severe the shorter is the time horizon for the adjustment as a large degree of uncertainty surrounds the assessment of the fiscal stance in the medium and long run we argue that policy makers should inform their policy based on the worst case scenario predicted by the indicator

on the solvency of nations cross country evidence on the dynamics of external adjustment we test the hypothesis that net foreign asset positions are consistent with external solvency and examine the dynamics of external adjustment using data for 50 countries over the 1970 2006 period our analysis adapts bohn s 2007 error correction reaction function approach which tests for a negative long run relationship between net exports nx and net foreign assets nfa as a sufficiency condition for the intertemporal budget constraint to hold to a dynamic panel framework pooled mean group pmg and mean group error correction estimation yield evidence of a statistically significant negative response of nx to nfa moreover we cannot reject the hypothesis that the response is largely homogeneous across countries our sensitivity analysis shows that the countries with relatively weaker fundamentals need to respond more strongly to the changes in nfa to keep their nfas on a sustainable path

asymmetric tax competition abstract the paper analyzes nash equilibrium when two jurisdictions set tax rates on a tax base which is mobile between them population differences imply tax differences the smaller jurisdiction levies a lower tax rate in equilibrium and its residents are better off than those in the larger jurisdiction the nash equilibrium is inefficient if the two jurisdictions merged the resulting allocation would be efficient however if differences in population are great enough residents of the small jurisdiction would be made worse off by such a merger

risk assessment under a nonlinear fiscal policy rule i introduction countries around the world are establishing nonlinear fiscal rules whereby governments respond more aggressively to lower deficits when debt is above some threshold level these policies range from the german style debt break which imposes limits on the deficits to fiscal rules that intensify fiscal consolidation at high debt levels the purpose of this paper is to study the implications of a nonlinear fiscal rule on solvency crisis do nonlinear fiscal rules allay the possibility of future insolvency does the increased responsiveness suggested by the nonlinear fiscal rules need to be exhibited at low levels of debt could fiscal authorities offset the stronger responsiveness at high levels of debt with a weaker responsiveness at low levels of debt without altering the probability of a solvency crisis we build on daniel and shiamptanis 2012 framework where negative shocks such as the 2007 2009 worldwide financial turmoil could lead a government to a position where agents refuse to lend thereby creating a solvency crisis to restore lending monetary and fiscal authorities could implement a policy switch in which the fiscal policy switches to active and the monetary policy to passive and the post crisis equilibrium is characterized by the fiscal theory of the price level ftpl 1 their analysis however utilizes a linear fiscal policy rule and assumes that authorities remain in the ftpl regime once they switch this paper modifies daniel and shiamptanis 2012 dynamic policy switching model to allow for a nonlinear fiscal policy rule that governs the evolution of the primary surplus relative to gdp and to allow the authorities to switch back to the original regime an important feature of the nonlinear fiscal rule is that it naturally yields an endogenous stochastic responsiveness to debt to capture changes in policy over time 2 we also build on bohn 1998 who argues that it is sufficient for a sustainable fiscal policy to satisfy the government s intertemporal budget constraint ibc bohn s analysis however does not incorporate a fiscal limit on the size of debt defined as the maximum level of debt that the country can repay bi 2012 bi et al 2010 2013 cochrane 2011 ghosh et al 2013 this paper can be viewed as an extension of bohn 1998 when a country faces fiscal limits we derive the criteria necessary for a nonlinear fiscal rule to satisfy both the government s ibc and eliminate explosive behavior the final contribution of the paper is empirical we apply the model to canada which is often cited as an example of a small open economy that implemented a significant fiscal adjustment lloyd ellis and zhu 2001 we estimate a nonlinear fiscal rule with annual data from 1970 to 2012 and utilize it to quantify the probability of a solvency crisis the following key results emerge first to eliminate explosive behavior the responsiveness of the nonlinear fiscal rule to debt should be larger than bohn s 1998 criterion second a nonlinear fiscal rule lowers the expected maximum level of debt on the path back to its long run target and also shortens the expected adjustment time third the strong responsiveness suggested by a nonlinear fiscal rule is very important to reduce the probability of a solvency crisis however this strength need not be exhibited until debt is high as long as the government has a stronger responsiveness at high levels of debt the responsiveness at low levels of debt has miniscule impact on solvency risk this paper is organized as follows section ii derives the necessary conditions for global stability and the dynamics leading to a solvency crisis under a nonlinear fiscal rule section iii estimates the policy parameters of the canadian fiscal rule and the probability of a solvency crisis section iv provides conclusions ii model we set up a simple small open economy model with a stochastic endowment

us deficit sustainability a new approach based on multiple endogenous breaks recent empirical work has questioned the consistency of us fiscal policy with an intertemporal budget constraint empirical results have tended to indicate that the deficit process has undergone at least one structural shift during recent decades with the deficit becoming either unsustainable or sustainable in only a weak sense in the post shift period in this paper we re examine sustainability using a new approach based on a cointegration model with multiple endogenous breaks a bayesian methodology is applied incorporating markov chain monte carlo simulators in contrast to previous analyses we find evidence of a sustainable deficit process over the 1947 1992 period despite the occurrence of breaks during the 1970s and 1980s copyright 2000 john wiley sons ltd

public debt in brazil sustentability and its implications abstract this paper tests sustainability of brazilian public debt in the period 1991 to 2009 and analyzes implications of requiring that the brazilian fiscal policy be primarily committed to the sustainability of the public debt the retrospective analysis utilizes a set of unit root tests and avoids some of the criticism leveled at previous studies by using data which has not previously been used for this purpose and concludes that the public debt was sustainable in the period we consider the prospective analysis is based on the dsge model proposed by jodi gali et al 2007 calibrated for brazil using the conclusions of the retrospective analysis for the fiscal parameters the scenarios produced with the help of the model show that maintaining the sustainability of the public debt is consistent with the monetary policy of inflation targeting we also conclude that it is possible to reduce interest rates to levels below those prevalent at the end of 2010 simultaneously maintaining the stability of the trajectory of the public debt

are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint abstract time series related to fiscal and external deficits are commonly subjected to stationarity and cointegration tests to assess if the deficits are sustainable such tests are incapable of rejecting sustainability the intertemporal budget constraint proves to be satisfied if either the debt series or the revenue and with interest spending series are integrated of arbitrarily high order i e stationary after differencing arbitrarily often revenues and spending do not have to be cointegrated rejections of low order difference stationarity and of cointegration are thus consistent with the intertemporal budget constraint error correction type policy reaction functions are suggested as more promising for understanding deficit problems

government budget deficits and trade deficits are present value constraints satisfied in long term data abstract we test whether long term data from the u s and u k are consistent with the intertemporal government budget constraint and external borrowing constraint both individually and simultaneously a very strong test is provided by our focus on whether the present value constraints pvcs continue to hold despite unusual events such as wars that cause a structural break in the short run dynamic behavior of the variables we find that the pvcs hold over the whole sample period the data also indicate that the pvcs continue to hold following events that cause a structural break in the short run dynamics

income shifting investment and tax competition theory and evidence from provincial taxation in canada abstract we study corporate income taxation when firms operating in multiple jurisdictions can shift income using tax planning strategies because income of corporate groups is not consolidated for tax purposes in canada firms may use financial techniques such as lending among affiliates to reduce subnational corporate taxes a simple theoretical model shows how income shifting affects real investment government revenues and tax base elasticities depending on whether firms must allocate income to provinces or not we then analyze data from administrative tax records to compare the behavior of corporate subsidiaries that may engage in income shifting to comparable firms that must use the statutory allocation formula to determine their taxable income in each province the evidence suggests that income shifting has pronounced effects on provincial tax bases according to our preferred estimate the elasticity of taxable income with respect to tax rates for income shifting firms is 4 9 compared with 2 3 for other comparable firms

fiscal policy rules and the sustainability of public debt in europe the sustainability of public debt is interpreted as the result of the interaction of fiscal policy with the economic environment and not as a statistical concept as in most of the recent literature if debt is not to explode over time policymakers have to respond to the changing conditions in the macroeconomic environment this article defines the conditions that will ensure compliance of fiscal policy with the intertemporal budget constraint in the context of europe s fiscal policy rules the empirical part of the article reveals that european public debt is sustainable in this respect but questions regarding long run liquidity requirements remain unresolved

estimating a fiscal reaction function the case of debt sustainability in brazil this article reviews recent trends in fiscal performance in brazil estimates fiscal reaction functions for the consolidated public sector and different levels of government and tests for the sustainability of the public debt dynamics the empirical analysis based on monthly data for the period 1995 2004 suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets in addition the central government appears to follow a spend and tax policy changes in revenue are affected strongly by expenditure about two thirds of changes in primary spending are offset by higher revenue over the longer term institutions are also found to matter for fiscal sustainability the responsiveness of the sub national fiscal stance to indebtedness as well as that of central government revenue to changes in primary spending appears to have become stronger after 1998 when ceilings on indebtedness were introduced

has federal budget deficit policy changed in recent years this paper applies new tests for parameter instability in cointegrated regression models to the u s federal government s intertemporal budget constraint in order to detect whether there has been a regime change in spending and taxing policies some researchers have argued that fiscal policy under presidents reagan and bush moved the u s deficit onto an unsustainable path my results suggest that government deficit policy in the 1980s was not significantly different from policies during the three earlier decades however a diverging debt gnp ratio suggests that the government will run into problems marketing its debt if current policy continues

fiscal sustainability and monetary versus fiscal dominance evidence from brazil 1991 2000 under a monetary dominant md regime the primary surplus adjusts to limit debt growth permitting monetary policy to be conducted independently of fiscal financing requirements in brazil some evidence favours an md regime for 1995 1997 but not for the decade of the 1990s as a whole while fiscal adjustments of 1999 yielded a primary surplus of about 3 of gdp consistent with solvency a credible md regime would require further adjustments of the primary surplus if debt increases growth falls or interest rates rise

do governments in developing countries pursue sustainable debt policies empirical evidence for selected countries in africa and latin america in this paper we test for sustainability of public debt in selected low and middle income developing countries of africa and latin america we do this by analysing how the primary surplus to gdp reacts to variations in the debt to gdp ratio where we allow for a time varying reaction coefficient moreover we test for stationarity of the overall budget deficit of the selected countries the results show that despite rising debt ratios there is empirical evidence for some of the countries that public debt is sustainable independent of whether they belong to the low income or middle income group of countries

sustainability and comovement of government debt in emu countries a panel data analysis we investigate the sustainability of fiscal policy in a set of 19 european monetary union emu countries over the period 1970 2016 panel unit root tests in the presence of cross section dependence show that the government debt series is stationary indicating that the solvency condition would be satisfied for these countries this confirms the effectiveness of the austerity measures implemented by these member states moreover an unobserved common factor drives the comovement of government debt in the eurozone

is the budget deficit too large some further evidence i introduction since the early 1980s the u s federal government has run unprecedented peacetime deficits the size of these deficits became a major issue in recent u s presidential elections for example during the 1992 elections ross perot successfully used his simple charts and tables to convey the notion that the size of the deficit was too large economists look at the deficit issue from a different perspective instead of emphasizing the size of the deficit at any particular point in time they are more concerned with the intertemporal solvency condition the present value of debt in the long run this condition focuses on the long run paths of interest inclusive expenditures and revenues unless these two variables trend together over the long run the government will have an incentive to default on the debt losing the confidence of investors from the standpoint of the intertemporal solvency condition are recent deficits too large do they represent boundless growth of government debt as an empirical proposition boundless growth of the debt corresponds to non stationarity of the deficit or the first difference of the debt recent developments in time series econometrics have provided ways to examine the intertemporal solvency condition for example hamilton and flavin 1986 and trehan and walsh 1991 apply stationarity tests to the u s federal deficit similarly hakkio and rush 1991 test for cointegration between interest inclusive expenditures and revenues while bohn 1991 tests for the cointegration of debt non interest expenditures and revenues hakkio and rush s results suggest that the deficit is too large for intertemporal solvency and thus the government has an incentive to default on its debt they conclude that over the period 1950 through 1989 interest inclusive expenditures and revenues are cointegrated but not one to one this suggests that although the present discounted value of the debt tends to zero the undiscounted value of the debt will be unbounded moreover they find that interest inclusive expenditures are not cointegrated with revenues over the period 1964 to 1989 the government debt appears to drift upward without bound overall hakkio and rush s results suggest that the government will have an incentive to default on the debt at some point in the future 1 we look at the issue from a different point of view we believe that a discrete break in the fiscal process occurred in the early 1980s as a result of several policy changes such as the 1981 economic recovery and tax act during the first reagan administration this reagan era change is modeled as a one time upward shift in the constant component of the deficit as mccallum 1984 shows a constant interest inclusive deficit does not imply boundless growth of government debt and should not provide an incentive to inflate away the debt as did previous research we conduct tests for the cointegration of interest inclusive expenditures and revenues as well as stationarity tests on the deficit 2 however we allow a shift in the intercept term of the cointegration and stationarity tests to capture the break in the fiscal process our results show that when the break is included expenditures and revenues are cointegrated with a coefficient not statistically different from unity i e that the deficit is stationary this contradicts the conclusions of hakkio and rush of course the way we choose the break date may be crucial to our analysis our initial choice of break date is based on prior information this is the approach used by perron 1989 who tests the u s gnp with a break chosen using prior information christiano 1992 criticizes perron 1989 on the a priori choice of the break date he suggests that the break date should be chosen using a formal pre test procedure moreover any statistical inference that follows must take this pre test procedure into account

nonlinearities and the sustainability of the government s intertemporal budget constraint i introduction fiscal policy sustainability is an important issue for european union eu countries which are subject to some forms of monitoring of their public finances the european stability and growth pact esgp constrains the fiscal policy of member states by limiting their autonomy in creating excessive deficits 1 this because fiscal disequilibria in one state create negative externalities for the other member countries and in the case of european monetary union emu countries can endanger the overall credibility of the euro currency on the other hand given the common monetary policy the correction of idiosyncratic shocks is assigned to the fiscal instrument alone imposing further pressure on the fiscal policy of member countries while the issue of sustainability of the public finances of the eu emu countries has received an increasing attention less attention has been paid to the issue of how the sustainability is achieved that is how budgetary authorities adjust fiscal policies to achieve maintain a sustainable path of public debt focusing on this adjustment by applying linear and nonlinear error correction models is the main purpose of this paper our empirical analysis is based on italy which provides an interesting case as it joined the emu in 1999 in spite of a stock of public debt of around 113 of nominal gdp against the 60 level required by the maastricht treaty and whose public accounts are often under scrutiny for struggling to comply with the esgp 2 as well as for subsequent downgradings of its sovereign debt by the main credit rating agencies 3 in this paper we address three main relevant policy questions first are the italian public finances sustainable second is the process of fiscal adjustment equally shared by changes in revenues and changes in government spending third does fiscal adjustment vary with the sign and magnitude of disequilibria and or with the state of the economy these are important questions for policy making purposes although our methodology is only applied to italy we feel our work should be of definite interest to other european countries and beyond bearing in mind that italy enjoys membership of the g7 economies and accounts for around 17 of eurozone s gdp a better understanding of how its public finances operate in practice is extremely important for monitoring the fiscal health of eurozone countries and minimizing at an early stage possible threats to eurozone s stability as well as limiting any spill over effects to the rest of the world further loans from the european financial stability facility 4 efsf can only meet the approval of policymakers if they feel confident they have a deep understanding of how individual member states pursue their own fiscal policies toward sustainability verifiability and credibility of sustainable fiscal policies would also condition the availability of the european stability mechanism consisting in a permanent bail out fund for eurozone member states bofinger et al 2010 that is expected to become operational from 2013 at the expiry of the efsf at the same time proposals for independent monitoring of public finances of member states as well as stricter sanctions such as the temporary suspension of voting rights for eurozone members that break the region s rules on public finances are put forward by the european central bank trichet 2010 all these recent policy developments confirm the importance of our research in providing a comprehensive framework for empirically testing the sustainability of fiscal policy our proposed approach provides a number of interesting findings the italian government s intertemporal budget constraint ibc is formally respected in spite of the high levels of public debt nevertheless the burden of correcting budgetary disequilibria is entirely carried out via changes in the average tax rate rather than changes in government spending or policy mixes

red signals current account deficits and sustainability abstract this paper proposes a method to asses the potential problems of sustainability of a country s sovereign debt we claim that the relevant variables used for this analysis are typically subject to changes that are associated with changes in macroeconomics policies we propose a procedure for identifying periods under which the current account accumulates at a non stationary rate our approach is based on imposing identifying restrictions on markov switching type models empirical applications of the procedure to argentina brazil japan uk and usa are examined and discussed

imperfect tax competition for profits asymmetric equilibrium and beneficial tax havens abstract we present a model of tax competition for real investment and profits and show that the presence of tax havens in some cases increases the tax revenue of countries in the first part of the paper we argue that tax competition for profits is likely to be imperfect in the sense that the jurisdiction with the lowest tax rate does not necessarily attract all shifted profits under this assumption tax competition between a large number of identical countries may lead to either a symmetric equilibrium with no profit shifting or an asymmetric equilibrium where firms shift profits from high tax to low tax countries in the second part of the paper we introduce tax havens starting from a symmetric equilibrium tax havens unambiguously reduce the tax revenue of countries due to a leakage effect tax havens attract tax base from countries and a competition effect the optimal response to the increased tax sensitivity of tax bases involves a reduction of tax rates starting from an asymmetric equilibrium however tax havens also raise the tax revenue of countries through a crowding effect tax havens make it less attractive to compete for profits and thus induce low tax countries to become high tax countries we demonstrate that the latter effect may dominate the former effects so that countries on balance benefit from the presence of tax havens

assessing the sustainability of external imbalances in the european union we assess the sustainability of the current account ca balance net international investment position niip and net external debt ned in a sample of 22 eu countries using two complementary approaches first we employ time series stationarity tests of current account balance to gdp ratios as well as cointegration tests of exports and imports of goods and services second we assess the level of trade balance that stabilises the niip and the ned we find that there is sustainability of the ca balance in eight countries niip in five countries and ned in 10 countries whereas there is evidence of a lack of sustainability in five debtor nations and three creditor nations both approaches are consistent with each other given the relationship between flows and stocks the existence of structural breaks and valuation effects via exchange rate and interest rate changes

fiscal transfers and fiscal sustainability we examine whether the u s and german state governments pursue sustainable fiscal policies taking into account fiscal transfers using panel data techniques we investigate whether the debt to gdp ratio had a positive influence on the primary surplus bohn model we show that including excluding fiscal transfers changes the results if fiscal transfers are not included in the primary surplus the test results do not indicate that the u s and german state governments pursued sustainable fiscal policies our results also suggest that fiscal transfers were positively related to debt these findings indicate that intergovernmental transfers have implicitly subsidized debts

transfer pricing regulation and tax competition abstract the paper analyzes multinational enterprises incentives to manipulate internal transfer prices to take advantage of tax differences across countries and implications of transfer pricing regulations as a countermeasure against such profit shifting we find that tax motivated foreign direct investment fdi may entail inefficient internal production but may benefit consumers thus encouraging transfer pricing behavior to some extent can enhance social welfare furthermore we consider tax competition between two countries to explore its interplay with transfer pricing regulations we show that the fdi source country will be willing to set a higher tax rate and tolerate some profit shifting to a tax haven country if the regulation is tight enough we also indicate a novel mechanism through which it is the larger country that undertakes tax motivated fdi the pattern we often observe in reality

debt and deficit fluctuations and the structure of bond markets we analyse the implications of optimal taxation for the stochastic behaviour of debt we show that when a government pursues an optimal fiscal policy under complete markets the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase by contrast under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit data for us government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness

coordination and the fight against tax havens abstract the success or failure of the fight against tax havens is the outcome of a many player coordination game between a tax haven and its potential investors key determinants are the costly international pressure and the size of the haven country s revenue pool the latter is determined endogenously by the decisions of many individual investors our analysis suggests a non standard market model that explains why haven countries would ever comply with international standards of transparency despite the large empirically observable returns in the tax haven business it also alludes to why service fees in tax havens can be positive despite a competitive financial market with multiple tax havens furthermore we identify a trade off between the fight against tax havens and high tax rates finally low fines for disclosed offshore tax evasion e g in special programs for tax evaders who voluntarily report their offshore wealth strengthen haven countries against international pressure

should countries control international profit shifting we present a fiscal competition model with two policy instruments the level of corporate taxation and the tightness of control of profit shifting by multinational firms mnf we show that a country may optimally decide not to monitor the mnf for two reasons firstly this country becomes an attractive location for mnf activity despite a high corporate tax secondly as the profits of the mnf become mobile the focus of tax competition is shifted taxation then influences both an mnf s location and the place where it declares its profits

trade in a tiebout economy the purpose of this paper is to explore both the positive and normative aspects of commodity trade in a tiebout economy by tiebout economy i mean an economy with a large number of small regions for example communities or states and no impediments to the mobility of individuals between these regions this type of economy has received widespread attention since the appearance of charles tiebout s classic 1956 article on local public goods in part because it bears a close relation to the standard competitive model this relation suggests that tiebout economies may serve as an

the taxation of foreign profits a unified view this paper synthesizes and extends the literature on the taxation of foreign source income in a framework that covers both greenfield and acquisition investment and a general constraint linking investment at home and abroad for the multinational by introducing a cost of adjustment for the mobile factor unless the cost of adjustment is zero the domestic tax on foreign source income should always be set to ensure the optimal allocation of the mobile factor between domestic and foreign assets and should follow the classical rules in the literature national optimality requires the deduction rule and global optimality requires the credit rule only in the zero cost case does exemption become optimal allowances can be set so as to ensure that domestic and foreign asset purchases are undistorted by the tax system this requires a cash flow tax on domestic investment in the greenfield case and a cross border cash flow tax on foreign investment in both cases these basic results extend to various extensions of the model notably i when a profit shifting motive is present and ii to some extent when a corporate income tax is in place the introduction of tax administration costs into the model can explain the empirical trend towards the use of the exemption regime

the dynamics of municipal fiscal adjustment abstract the dynamic fiscal policy adjustment of local jurisdictions is investigated empirically using a panel of more than 1000 u s municipalities over a quarter of a century distinguishing own source revenue grants expenditures and debt service the analysis is carried out using a vector error correction model which takes account of the intertemporal budget constraint the results indicate that a large part of the adjustment in response to fiscal imbalances takes place by offsetting changes in future expenditures in addition the results show that fiscal imbalances are financed to a significant extent by subsequent changes in grants decomposition of the sample according to average city population reveals that the basic pattern of fiscal adjustment is robust although intergovernmental grants play a much more pronounced role in maintaining budget balance for large cities

tax competition with parasitic tax havens we develop a tax competition framework in which some jurisdictions called tax havens are parasitic on the revenues of other countries the havens use real resources to help companies camouflage their home country tax avoidance and countries use resources in an attempt to limit the transfer of tax revenues to the havens the equilibrium price for this service depends on the demand and supply for such protection recognizing that taxes on wage income are also evaded we solve for the equilibrium tax rates on mobile capital and immobile labor and we demonstrate that the full or partial elimination of tax havens would improve welfare in non haven countries in part because countries would be induced to increase their tax rates which they have set at inefficiently low levels in an attempt to attract mobile capital we also demonstrate that the smaller countries choose to become tax havens and we show that the abolishment of a sufficiently small number of the relatively large havens leaves all countries better off including the remaining havens

the tax smoothing hypothesis evidence from sweden 1952 1999 this paper tests barro s 1979 tax smoothing hypothesis using swedish central government data for the period 1952 1999 according to the tax smoothing hypothesis the government sets the budget surplus equal to expected changes in government expenditure when expenditure is expected to increase the government runs a budget surplus and when expenditure is expected to fall the government runs a budget deficit the empirical evidence suggests that the model provides a useful benchmark and that tax smoothing behavior can explain about 60 percent of the variability in the swedish central government budget surplus

the sustainability of india s current account this study conducts an investigation into the sustainability of the indian current account using data for 1950 onwards a necessary condition for current account sustainability is that exports and imports are cointegrated after testing for unit roots that allow for a structural break we employ parametric tests for cointegration based on johansen 1995 and saikkonen and lutkepohl 2000a b c as well as the nonparametric procedure proposed by breitung 2002 and breitung and taylor 2003 that does not assume linearity by employing these procedures recursively two distinct regimes are identified characterized by whether or not imports and exports are cointegrated the regime of noncointegration runs until the late 1990s and the second regime of cointegration is present after that this latter regime coincides with the liberalization of the indian economy