fabrizio balassone and maura francese (*)
DESCRIPTION
Cyclical Asymmetry in Fiscal Policy, Debt Accumulation and the Treaty of Maastricht. Fabrizio Balassone and Maura Francese (*). (*) Banca d’Italia - Research Department. Structure of the presentation 1 - Motivation 2 - The stylised framework 3 - Empirical results - PowerPoint PPT PresentationTRANSCRIPT
Fabrizio Balassone and Maura Francese (*)
Cyclical Asymmetry in Fiscal Policy, Debt Accumulation and the Treaty of Maastricht
(*) Banca d’Italia - Research Department
Structure of the presentation
1 - Motivation
2 - The stylised framework
3 - Empirical results
3.1 - Asymmetry in fiscal policy
3.2 - Impact of EMU fiscal rules
3.3 - Debt accumulation
4 - Conclusion and Possible extensions
Motivation
three issues on which evidence is scarce and not conclusive
a - is fiscal policy asymmetric over the cycle?
EC (2001), Buti et al. (1998), Buti-Sapir (1998),
b - if so, how did this contribute to debt accumulation?
Melitz (2002)
c -did EMU fiscal rules affect fiscal reaction to the cycle?
Galì-Perotti (2003)
Stylised framework: (1) fiscal balance components
1) bt = blt + bc
t
bt budget balance (with bt>0 indicating a deficit)bl
t long-run component bc
t cyclical component
2) blt = bt-1 + ( b* - bt-1) + (d* - dt-1) ,>0
dt government debtb*, d* preferred levels; d*=b*/kk trend nominal growth
3) bct = E[t]
t output gap
Stylised framework: (2) asymmetry in fiscal policy
4) bct = p E[t
P] + n E[tN]
pn
E[t] if E[t] >0E[t
P] = 0 if E[t] <0
E[t] if E[t] <0E[t
N]= 0 if E[t] >0
Stylised framework: (3) the estimating equation
5) bt= 0+1dt-1+ 2bt-1+p E[tP] + n E[t
N]
where 0=(+/k)b* 1=- 2=(1-)
Stabilisation policy n,p<0
Index of asymmetry in the conduct of fiscal policy:
6) = n - p
The data
sample: EU countries (excluding Luxembourg), USA and JP
coverage for b and d ranges from 1969-2002 to 1977-2002
output gap: E[t] = t
t: HP filter applied to GDP (1960-2004) drop from 2001 (end point bias)
Empirical results: (1) Asymmetry in fiscal policy
Table 1 - Full sample
Variable Fixed effect model - OLS
Arellano-Bond estimation
Constant 1,310 -0,006
(0,246) (0,013)Lagged Debt (dt-1) -0,022 -0,020
(0,004) (0,006)Lagged Balance (bt-1) 0,884 0,883
(0,027) (0,026)
Current Positive Cycle t mt -0,052 -0,054
(0,078) (0,074)
Current Negative Cycle t (1-mt) -0,416 -0,414
(0,080) (0,075)
Observations 466 450
Ratcheting n
p -0,364 -0,360
test: =0 (p-value in brackets) -2,69 (0,007) 8,01 (0,005)
b* with k=0,05 2,396
Table 2 - EU countries (excluding Luxembourg)
Variable Arellano-Bond Fixed effect
OLS
Constant 0,026 1,045
(0,016) (0,271)Lagged Debt (dt-1) before Maastricht -0,013 -0,008
(0,006) (0,006)Lagged Debt (dt-1) after Maastricht -0,029 -0,022
(0,006) (0,004)Lagged Balance (bt-1) 0,841 0,844
(0,028) (0,030)
Current Positive Cycle t mt -0,129 -0,118
(0,791) (0,085)
Current Negative Cycle t (1-mt) -0,416 -0,408
(0,079) (0,085)
Observations 391 405
Ratcheting n
p -0,287 -0,290
test: =0 (p-value in brackets) 4,58 (0,032) -2,00 (0,046)b*=
0/[(1- (1/k)] with k=0,05 - before Maastricht 3,212b*=
0/[(1- (1/k)] with k=0,05 - after Maastricht 1,776
test: 1a92-1b92 =0 (p-value in brackets) 21,54 (0,000) 4,10 (0,000)
Empirical results: (2) Impact of EMU rules
Empirical results: (3) Debt Accumulation
(7) dt= dt-1/(1+kt) + b^t + st where b^t = OLS fitted valuesst = stock-flow adj.
Table 3 - Actual and simulated debt accumulation Av 16 Av EU DE IT PT USA
Initial government debt a 34,51 33,73 18,57 37,92 15,32 49,30
Actual Government debt in 2000 b 68,12 64,75 60,19 110,62 53,27 59,88
Observed variation c=b-a 33,61 31,02 41,62 72,69 37,95 10,58
Simulated debt in 2000: Asymmetric fiscal policy d 61,59 59,09 51,16 105,59 55,71 59,78
Symmetric fiscal policy e 51,75 49,16 41,88 98,90 41,85 51,93
Induced Debt Accumulation f=d-e 9,84 9,93 9,28 6,69 13,86 7,85
% of observed variation 29,3 32,0 22,3 9,2 36,5 74,2
b* before 1992 3,21 1,93 6,70 3,86b* after 1992 1,78 1,07 3,70 2,13
2,40 2,47
Debt Accumulation: a graphical illustration
Italy - Debt GDP ratio
30
40
50
60
70
80
90
100
110
120
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
asymmetric symmetrict
dt
no reaction
asymmetric
symmetric
dt* a
dt* s
1 2
Conclusions and possible extensions
Main findings:
- significant cyclical asymmetry in fiscal policy (n=-0.4; p=0.0)
- sizeable contribution to debt accumulation (about one third)
- no effect from EMU fiscal rules
Possible extensions:
- separate analysis of revenue and expenditure
- distinction between automatic and discretionary reaction
- robustness to different measures of expected output gap
- specification of control variables to account for different governments and institutional settings