contagion macroeconomic models with multiple equilibria abstract several concepts of contagion are distinguished it is argued that models that allow only a single equilibrium conditional on the macroeconomic fundamentals are not adequate to capture all forms of contagion hence it is useful to formulate macro models that admit multiple equilibria and self fulfilling expectations a simple balance of payments model is presented to illustrate that phenomenon and some back of the envelope calculations assess its relevance to the coincidence of emerging market crises in 1994 95 and in 1997

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

modelling the fiscal reaction functions of the gips based on state varying thresholds we introduce non linear fiscal reaction functions with endogenously estimated state varying thresholds to capture the behaviour of fiscal policy authorities during good and bad times these thresholds vary with the level of debt the economic cycle and a financial pressure index

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

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

common trends the government s budget constraint and revenue smoothing abstract the requirement that the government s budget be balanced in present value terms is shown to be equivalent to the condition that government expenditures inclusive of interest tax receipts and seignorage be cointegrated the condition is in fact stronger requiring that the deficit inclusive of interest be stationary stationarity of the net of interest deficit is neither necessary nor sufficient for intertemporal budget balance however it does have implications for barro s tax smoothing hypothesis data for the period 1890 1986 are consistent with intertemporal budget balance but not with tax smoothing

international evidence on fiscal solvency is fiscal policy responsible abstract we conduct a cross country empirical analysis of fiscal solvency based on dynamic stochastic general equilibrium conditions the results show evidence of fiscal solvency in the form of a robust positive conditional response of the primary balance to changes in public debt in panels for emerging and industrial economies and in a combined panel emerging economies show a stronger response and hence converge to lower mean debt output ratios as observed in the data the results are weaker for countries with debt ratios exceeding panel means and medians hence we can separate countries where fiscal solvency holds from those where it remains in doubt

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

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

financial market activity under capital controls lessons from extreme events abstract we investigate the contemporaneous relation between return and transaction volume in distribution tails under the restrictions on transactions due to the capital controls implemented on the athens stock exchange in july 2015 we use bivariate extreme value theory to model the tail dependence structure we show that restrictions on transactions have an impact on the activity of market participants

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

progressivity horizontal equity and reranking in health care finance a decomposition analysis for the netherlands this paper employs the method of aronson et al 1994 to decompose the redistributive effect of the dutch health care financing system into three components a progressivity component a classical horizontal equity component and a reranking component results are presented for the health care financing system as a whole as well as for its constituent parts a final section sets out to uncover the relative importance in terms of their effects on progressivity horizontal equity and reranking of the key institutional features of one component of the dutch system the awbz social insurance scheme

the redistributive effect of health care finance in twelve oecd countries the oecd countries finance their health care through a mixture of taxes social insurance contributions private insurance premiums and out of pocket payments the various payment sources have very different implications for both vertical and horizontal equity and on redistributive effect which is a function of both this paper presents results on the income redistribution consequences of the health care financing mixes adopted in twelve oecd countries by decomposing the overall income redistributive effect into a progressivity horizontal inequity and reranking component the general finding of this study is that the vertical effect is much more important than horizontal inequity and reranking in determining the overall redistributive effect but that their relative importance varies by source of payment public finance sources tend to have small positive redistributive effects and less differential treatment while private financing sources generally have larger negative redistributive effects which are to a substantial degree caused by differential treatment

the global side of the investment saving puzzle in this paper we reexamine the long standing and puzzling correlation between national saving and investment in industrial countries we apply an econometric methodology that allows us to separate idiosyncratic correlation at the country level from correlation at the global level in a major break with the existing literature we find no evidence of a long run relationship in the idiosyncratic components of saving and investment we also find that the global components in saving and investments commove indicating that they react to shocks of a global nature

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

are currency crises self fulfilling abstract this paper studies the respective roles of the fundamentals and self fulfilling speculation in currency crises we first present a model of a fixed exchange rate system in which self fulfilling speculation can arise following a bifurcation in the fundamentals we then estimate the model in the case of the 1992 3 crisis of the french franc and find some evidence that self fulfilling speculation was at work

mexico s balance of payments crisis a chronicle of a death foretold this paper claims that the roots of mexico s balance of payments crisis are found in the prevailing high degree of capital mobility and financial globalization under these circumstances shifts in foreign capital flows and anticipation of a banking system bailout may produce large imbalances between stocks of financial assets and foreign reserves threatening the sustainability of currency pegs econometric analysis suggests that half of mexico s reserve losses could be accounted for by these phenomena large financial imbalances are also fertile ground for self fulfilling prophesy crises which lead devaluations to produce deep recessions these difficulties can be partly remedied by appropriate policies

on the limitations of government borrowing a framework for empiricaltesting this paper seeks to distinguish empirically between two views on the limitations of government borrowing according to one view nothing precludes the government from running a permanent budget deficit paying interest due on the growing debt load simply by issuing new debt an alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms we show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals empirical tests which have been developed for this economic question lead us to conclude that postwar u s deficits are largely consistent with the proposition that the government budget must be balanced in present value terms this abstract was borrowed from another version of this item

government solvency and financial markets dynamic panel estimates for the european monetary union abstract we assess government solvency in the european monetary union emu controlling for the interaction of fiscal policy with financial markets we find a positive interaction reflecting market based pressures for fiscal improvement and significant debt stabilization efforts weakened in the post emu era

financial instability under a flexible exchange rate many governments in developing countries contemplate the possibility of increasing the flexibility of their exchange rates despite having accumulated substantial dollar denominated debt using a model of corporate dollar debt in which the future exchange rate is uncertain this paper studies the financial risks that might arise as a consequence of increased exchange rate flexibility since a firm may default on its debt either because its dollar income is too low or because investors refuse to roll over its debt the measure of the overall risk of default should take into account both factors as well as their interaction solving the model for the no default rational expectations equilibrium we find that a small risk of insolvency may bring about a substantial risk of illiquidity

distributional incentives in an equilibrium model of domestic sovereign default the european debt crisis shares features of historical episodes of outright default on domestic public debt about which little research has been done this paper proposes a theory of domestic sovereign default in which a government chooses debt and default optimally responding to distributional incentives affecting the welfare of risk averse agents who are split into debt holders and non holders equilibria with debt do not exist if the government is utilitarian and default is costless adding exogenous default costs the model supports equilibria with debt exposed to default risk in which debt falls as the fraction of agents who own the debt falls debt can also be sustained if the government s welfare weights are biased in favor of bond holders resulting in equilibria in which debt rises as debt ownership is more concentrated these results are robust to adding a second asset opening the economy to foreign investors or introducing taxes as an alternative redistributive policy instrument

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

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

the sustainability of current account deficits abstract this paper proposes a new method of determining whether a country is likely to be able to sustain its current account deficits without defaulting on its debt it is based on the notion of the national intertemporal budget constraint ibc which is derived from a forward solution of the balance payments identity although the problem is formally similar to that considered in the literature on the government ibc a more general solution is obtained by allowing the primary deficit to be endogenous instead of exogenous it is shown that the existence of negative feedback from net indebtedness to the primary deficit a wealth effect is sufficient this method supplants the ad hoc approach previously adopted in the current account literature whilst many of the same variables appear a formal structure for analysing them is provided

redistribution effect and unequal income tax treatment decomposing the post tax gini coefficient across groups of pre tax equals reveals the separate contributions to the redistributive effect of an income tax of 1 the effective schedule the vertical effect 2 the unequal treatment of equals arising from departures from this effective schedule the horizontal effect and 3 the reranking of unequals as a result of such departures the reranking effect the methodology is applied to u k microdata throughout the period 1978 91 reranking understates the negative contribution to redistributive effect of unequal tax treatment by about one third and is far outweighed by the vertical effect copyright 1994 by royal economic society

equity in health care finance in palestine the triple effects revealed this paper presents an application of the urban and lambert upgraded ajl decomposition approach that was designed to deal with the problem of close income equals in equity analysis and as applied to the area of health care finance contrary to most previous studies vertical and horizontal inequities and the triple effects of inter groups intra group and entire group reranking of various financing schemes are estimated with statistical significance calculated using the bootstrap method application is made on the three financing schemes present in the case of the occupied palestinian territory results demonstrate the relative importance of the three forms of reranking in determining overall inequality the paper offers policy recommendations to limit the existing inequalities in the system and to enhance the capacity of the governmental insurance scheme

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

statistical inference of progressivity dominance an application to health care financing distributions this paper employs a distribution free statistical test suitable for comparisons based on dependent samples to analyse changes in health care financing distributions on finnish data in distinction to the more general summary index approach used in most studies of progressivity measurement the difference between the lorenz curve of income inequality and the concentration curves of various taxes and payments is used to evaluate progressivity dominance and changes in progressivity sample weights are applied to account for the effect of sampling design and non response the analysis demonstrates that the dominance approach can be successfully applied to various types of distributional problems besides comparisons concerning differences in income distributions as an empirical application the paper presents estimation results for the progressivity of various health care financing sources using data from the 1987 and 1996 finnish health care surveys

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

the mexican peso crisis sudden death or death foretold abstract we argue that allowing for the possibility of a self fulfilling panic helps to understand several features of the recent mexican crisis self fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short term dollar debt we present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt but not for others lastly we argue that the imperfect credibility of mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994 our model formalizes the reasons why this is so

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

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

debt deflation financial market stress and regime change evidence from europe using mrvar the economic meltdown since 2008 9 has created disinflation and even deflation in some countries in the euro area in a period with large debt overhang creating the condition for a continuing financial market stress in the euro area as disinflation and deflation push up the real interest rate while growth and income declines the leveraging problem becomes more severe and the economy risks shifting into a regime with high insolvency risk high financial stress rising credit spreads possibly accompanied by strong adverse macroeconomic feedback loops investigating the consequences of those magnifying feedback loops given the debt deflation we demonstrate the possibility of unstable dynamics and downward spirals in the presence of regime dependent macro feedback loops using a theoretical model with decentralized matching mechanisms on both labor and financial markets to explore the amplifying linkages between deflation output labor and financial markets we employ a new solution procedure called nmpc to solve our models variants for out of steady state dynamics we empirically explore deflationary trends in europe and employ a global var gvar model for a large euro area macro data set to estimate the impact of deflation on output moreover we use a four variable multi regime var mrvar model with regime dependent irs to study deflationary as well as well as the financial risk drivers in a mrvar setting new measures for financial risk drivers are employed and multi regime irs for output inflation rates interest rates and financial stress are explored we also study regime changes in central macro relationships such as regime change in the credit output link the phillips curve and in okun s law

default on sustainable public debt illiquidity suspect convicted abstract according to a well established economic principle any public debt that does not exceed the discounted stream of future primary surpluses should find buyers this paper argues why this principle may not hold if the government has only imperfect control over its net income flow a small risk of unsustainability appears to be at the origin of a much larger risk of illiquidity solving the model for the rational expectations equilibrium we find that the maximum debt level that investors are willing to hold may be much lower than the commonly used sustainable level

u s federal indebtedness and the conduct of fiscal policy abstract this paper examines whether the conduct of u s fiscal policy since the 1920s has been influenced by constraints on the accumulated stock of outstanding federal debt the evidence is affirmative during most of the inter and post war period policy in effect stabilized the federal debt relative to gnp but after 1981 large debt and debt service costs failed to produce deficit reductions consistent with the pattern of previous decades

bohn s test of fiscal sustainability of the american state governments the dramatic fall in state revenues during the great recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability i employ a model based approach proposed by bohn 1998 to test for sustainability in this approach a positive and significant reaction of the ratio of primary surplus ratio s to lagged debt constitutes a sufficient condition for sustainability based on a panel of 48 contiguous states 1961 2008 and several model specifications i find robust evidence in favor of sustainability further analysis suggests that the adjustment of the components of s to debt is asymmetric with the revenue side bearing a heavier burden than the spending side the response of s is also found to be asymmetric with respect to the level of debt finally the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and own revenue and no deficit carryover provisions in particular

what can new survey data tell us about recent changes in distribution and poverty it has been claimed that in recent times the poor have lost ground both relatively and absolutely even when average levels of living have risen this article tests that claim using household surveys for 67 developing and transitional economies over 1981 94 it finds that changes in inequality and polarization were uncorrelated with changes in average living standards distribution improved as often as it worsened in growing economies and negative growth was often more detrimental to distribution than positive growth overall there was a small decrease in absolute poverty although with diverse experiences across regions and countries almost always poverty fell with growth in average living standards and rose with contraction

interpretation and limits of sustainability tests in public finance public debt is considered sustainable if discounted net repayments are expected to cover the initial debt issuance i e if the government s inter temporal budget constraint is expected to hold with risk averse lenders and an uncertain economic environment bohn 1995 stresses that this constraint relies on a stochastic discount factor which depends on lenders preferences to get round the difficulty related to the specification of private agents preferences in empirical analysis bohn 1998 suggests to estimate fiscal reaction functions describing how primary surplus reacts to indebtedness after having solved the econometric issues arising when primary surplus and debt have a very different persistence with a nonparametric approach or are both integrated with parametric tests we estimate fiscal reaction functions for france and greece there remain important limitations and interpretation difficulties that are common to all econometric sustainability tests

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

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

trigger points and budget cuts explaining the effects of fiscal austerity we propose and solve an optimizing model which explains counterintuitive effects of fiscal policy in terms of expectations if government spending follows an upward trending stochastic process which the public believes may fall sharply when it reaches specific trigger points then optimizing consumption behavior and simple budget constraint arithmetic imply a nonlinear relationship between private consumption and government spending this theoretical relation is consistent with the experience of several countries jel e62 e21 textbook aggregate demand models suggest simple relationships between the government budget and economic activity a cut in the government deficit for example depressing consumption and output though such models heavily influence the design of stabilization policies their micro foundations are unclear and their sharp predictions are not always consistent with reality in many countries large cuts in government spending carried out as part of stabilization programs have led to expansions rather than contractions in economic activity the absence of simple relationships be