This paper introduces a Regime-Switching Model-Based Sustainability test allowing for periodic (or local) violations of Bohn (1998, QJE)’s sustainability condition. We assume a Markov-switching fiscal policy rule whose parameters stochastically switch between sustainable and unsustainable regimes. We demonstrate that long-run fiscal sustainability not only depends on regime-specific feedback coefficients of the fiscal policy rule but also on the average durations of fiscal regimes. Evidence on French data suggests that both the No-Ponzi Game condition and the Debt-stabilizing condition hold in the long-run, when accounting for fiscal regimes, contrary to standard MBS tests.
Author: | Pierre; Jérôme, Aldama; Creel |
Volume: | 2017.01 |
Publisher: | INFER |
Year: | 2017 |
No. of pages: | 27 |
Category: |