Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/162679
Authors: 
Checherita-Westphal, Cristina
Žďárek, Václav
Year of Publication: 
2017
Series/Report no.: 
ECB Working Paper 2036
Abstract: 
This paper estimates a fiscal reaction function (FRF) framework for euro area countries and derives a novel approach to measure fiscal fatigue. As in previous studies, we find evidence that euro area sovereigns abide, on average, by (weak) sustainability constraints. The primary balance improves by about 0.03-0.05 for every 1 percentage point increase in the debt-to-GDP ratio after controlling for other relevant factors. The positive reaction of primary surpluses to higher debt strengthened over the crisis. Based on this framework, we propose a simple, practical measure of fiscal fatigue that can be used to assess the capacity of sovereigns to maintain primary surpluses over extended periods of time. This measure can be derived by comparing simulated primary balance paths in the context of debt sustainability analyses with countries' track-record, adjusted for the change in debt with the estimated fiscal reaction coefficient. The evidence of fiscal fatigue in non-linear FRF specifications is weaker for our euro area sample.
Subjects: 
fiscal fatigue
fiscal reaction function
financial crisis
debt sustainability
euro area
JEL: 
H60
E62
F41
C33
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2758-1
Document Type: 
Working Paper

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