Stochastic Trends, Debt Sustainability and Fiscal Policy

46 Pages Posted: 26 Apr 2016

See all articles by Karim Barhoumi

Karim Barhoumi

International Monetary Fund (IMF)

Reda Cherif

International Monetary Fund (IMF)

Nooman Rebei

International Monetary Fund (IMF)

Date Written: March 2016

Abstract

We study empirically the reaction of fiscal policy to changes in the permanent and transitory components of GDP in a panel of countries. We find evidence that government spending tends to be counter-cyclical conditional on temporary shocks and pro-cyclical conditional on permanent shocks. We also find no evidence that developing countries are systematically different from developed ones in terms of fiscal policy. We present a theory featuring a fiscal reaction function to the output gap and a measure of debt sustainability. The fiscal impulse response to a permanent (temporary) shock to GDP is positive (negative) as the effect on debt sustainability (current output gap) dominates. The results are mostly sensitive to the relative weight of debt sustainability in the fiscal reaction function as well as to the extent of real rigidities in the economy.

Keywords: Cyclicality, debt, future, government spending, permanent shocks, General, All Countries,

JEL Classification: E20, E30

Suggested Citation

Barhoumi, Karim and Cherif, Reda and Rebei, Nooman, Stochastic Trends, Debt Sustainability and Fiscal Policy (March 2016). IMF Working Paper No. 16/59, Available at SSRN: https://ssrn.com/abstract=2770294

Karim Barhoumi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Reda Cherif

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Nooman Rebei

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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