Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/68203
Authors: 
Legrenzi, Gabriella Deborah
Milas, Costas
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper: Public Finance 4001
Abstract: 
We extend previous work on the sustainability of the government's intertemporal budget constraint by allowing for non-linear adjustment of the fiscal variables, conditional on (i) the sign of budgetary disequilibria and (ii) the phase of the economic cycle. Further, our endogenously estimated threshold for the non-linear adjustment is not fixed; instead it is allowed to vary over time and during financial crises. Our analysis presents particular interest within the current economic scenario of financial crises, poor growth and debt crises. Our empirical analysis, applied to the GIPS, shows evidence of a threshold behaviour for the GIPS, that only correct large unbalances, which, in the case of Greece and Portugal, are higher than the EGSP criteria. Financial crises further relax the threshold for adjustment: during financial crises, only very large budgetary unbalances are corrected.
Subjects: 
debt sustainability
fiscal adjustment
nonlinear models
JEL: 
H63
H20
H60
C22
Document Type: 
Working Paper

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