Fiscal reaction functions across the world: in quest of statistical (in)significance

António Afonso, João Tovar Jalles

Research output: Contribution to journalArticle

Abstract

We estimate fiscal reaction functions for a panel of 173 countries using data between 1970 and 2014. Most notably, we assess the existence of non-Ricardian regimes, as postulated in the fiscal theory of the price level (FTPL), or, contrarily, the possibility of Ricardian regimes. We find that governments have on average increased the primary balance as a response to higher previous government indebtedness, implying a Ricardian fiscal regime. In addition, the Ricardian results are confirmed for the advanced countries and for the euro area group. A more Ricardian fiscal regime emerged after 1995 and notably in the subperiod 2008–2014, after the global financial crisis (before that, statistical insignificance is the norm). From a P-VAR analysis, we find that increases in government indebtedness increase primary balances, supporting overall the existence of an average Ricardian fiscal regime.

Original languageEnglish
Pages (from-to)207-228
Number of pages22
JournalFinanzArchiv
Volume75
Issue number3
DOIs
Publication statusPublished - 2019

Keywords

  • Cross-sectional dependence
  • Fiscal reaction function
  • Global financial crisis
  • Panel data
  • Panel VAR

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