Designing fiscal policy

On the trade-off between macroeconomic stabilization and government debt sustainability

by Tore Dubbert
Doctoral thesis
Date of Examination:2023-03-24
Date of issue:2023-04-24
Advisor:Prof. Dr. Tino Berger
Referee:Prof. Dr. Tino Berger
Referee:Prof. Dr. Bernd Kempa
Referee:Prof. Dr. Robert Schwager
Persistent Address: http://dx.doi.org/10.53846/goediss-9854

 

 

Files in this item

Name:dissertation_ediss.pdf
Size:3.04Mb
Format:PDF

The following license files are associated with this item:

Abstract

English

This dissertation, comprising three academic papers, deals with the trade-off between fiscal sustainability and macroeconomic stabilization. The first paper examines the specification of fiscal reaction functions: We argue that the fiscal response to public debt is varying over time, finding formal empirical evidence in favor. We then link this non-linear fiscal response to changes in the interest rate-growth differential and the level of public debt. The second paper takes time-varying parameter fiscal reaction functions to an out-of-sample forecast performance evaluation, embedding it in a stochastic debt sustainability analysis framework to forecast the primary balance and public debt for a sample of ten OECD countries. The results suggest that stochastic debt sustainability analyses featuring time-varying parameter fiscal reaction functions perform competitively at short horizons, implying a potential role for fiscal forecasting at policy institutions. The third paper provides a quantitative framework to assess government spending policies based on their effects on the business cycle in the United States. Identifying the output gap from the Beveridge-Nelson decomposition, we find that the dosage of expansionary fiscal policy is key: Pronounced fiscal stimulus does increase the output gap, but can lead to an overheating economy and increasing public debt levels.
Keywords: fiscal policy; fiscal reaction function; macroeconomic stabilization; state-space models; Bayesian estimation; government debt sustainability analysis; business cycles
 
Statistik