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GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 06 de 2013

   

Are There Change-Points in the Likelihood of a Fiscal Consolidation Ending?


Luca Agnello

Banque de France and University of Palermo

Vítor Castro

Universidade de Coimbra, GEMF e NIPE

Ricardo M. Sousa
Universidade do Minho, NIPE, London School of Economics e FMG

Abstract:
Recent research has shown that the likelihood of fiscal consolidations ending is dependent on its age. Whether its behaviour is smooth or bumpy is an issue that deserves further attention.
In this paper, we start by building on a narrative approach to identify episodes of fiscal consolidation. Then, we use data for a group of 17 industrial countries over the period 1978-2009 and both continuous-time and discrete-time duration models to investigate whether the fiscal consolidation programs are duration dependent. We find evidence suggesting that the likelihood of a fiscal consolidation ending indeed increases over time. Finally, we extend the baseline Weibull duration model in order to allow for the presence of a change-point in the duration dependence parameter. The empirical findings show that positive duration dependence is present in fiscal consolidations that last less than six years, but no evidence of duration dependence is found for older consolidations. Additionally, fiscal consolidations tend to last longer in non-European than in European countries. From a policy perspective, the results contained in this paper emphasize that chronical fiscal imbalances might lead to a vicious austerity cycle, which, in turn, becomes responsible for longer fiscal consolidation programs. Moreover, they highlight the importance of the existence of an institutional framework that imposes some discipline in the behaviour of fiscal authorities as a means of achieving credible and, thereby, shorter adjustment measures.

JEL Classification: C41; E62.

Keywords:
Fiscal Consolidation, Duration Analysis, Weibull Model, Duration Dependence, Change-Points.

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