Ricardian Equivalence: an Empirical Application to the Portugese Economy.

It is the purpose of this paper to focus on the consequences of the Ricardian offset to the conduct of stabilising fiscal policies. If equivalence prevails there is no scope for effective stabilising fiscal policies. A review of the theoretical requirements of Ricardian equivalence reveals that they are not likely to be fulfilled in practice. However, the brief survey of the empirical applications shows that the published empirical evidence is inconclusive. An empirical application for the Portuguese economy is carried out. The tests are based on reduced-form consumption functions and on the Euler equation approach. The overall results are ambiguous.

Sustainability of Portuguese Fiscal Policy in Historical Perspective

This paper analyses the sustainability of Portuguese public finances, making use of a long dataset with more than a full century of observations. The use of such a long dataset is appropriate because both unit root and cointegration tests require a long period of data. The sustainability testing procedure is based on unit root and cointegration tests. We find considerable evidence in favour of sustainability for the 1903-2003 period. The overall conclusion of sustainability for the 1903-2003 period is not maintained for the more recent 1975-2003 period, which is characterised by the largest GDP deficit ratios of our sample. This latter period appears to signal a shift to an unsustainable path in Portuguese fiscal policy. Hence, our results suggest that fiscal consolidation efforts must, in fact, be continued in Portugal.fiscal sustainability, sustainability of public debt, intertemporal budget constraint, government deficits and debt, Portugal

Fiscal sustainability and the accuracy of macroeconomic forecasts: do supranational forecasts rather than government forecasts make a difference?

Credible fiscal plans that aim at restoring fiscal sustainability will be essential to counter the present increase in debt levels all across Europe. The macroeconomic scenario of such plans will be crucial. This paper assesses whether there is any advantage in delegating (part of) such power to supra-national forecasts. The evidence on the relative performance of the European Commission’s (EC) growth forecast is rather mixed, with considerable variation at the country level. Some national government forecasts (France, Italy, and Portugal) perform worse in terms of descriptive statistics than the EC forecast for all forecast horizons. For the year ahead the EC growth forecast is better than the official forecasts for almost ¾ of the EU-15 countries. All in all, since the EC forecast appears to be a good benchmark, in order to reduce the (optimistic) forecast bias, national governments could be forced to justify any large (optimistic) deviation from this benchmark when presenting their respective national stability and growth programmes.Sustainability of public debt; Fiscal policy; Stability and Growth Pact; Fiscal forecasting; forecast evaluation; real-time data.

Output Smoothing in EMU and OECD: Can We Forego Government Contribution? A Risk Sharing Approach

This paper analyses the smoothing of asymmetric shocks to output for a sample of OECD countries. It also examines whether the private capital markets will be able to replace the government in providing output smoothing in the euro-area, in the near future. The research finds no evidence of large differences in the patterns of risk sharing for the 19 OECD countries, the EU-15 or euro-area countries, for the period 1970-1999. However, there were shown to be considerable differences between the euro-area and the successful monetary union of the USA: the euro-area showed a much lower insurance of asymmetric shocks than the US states. Until increasing economic integration in Europe does not lead to a substantial decrease in the incidence of idiosyncratic shocks, such shocks may impose non-negligible welfare costs.EMU, output smoothing, risk sharing, international capital markets, economic integration

Has the Stability and Growth Pact stabilised? Evidence from a panel of 12 European countries and some implications for the reform of the Pact

Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP is being accused of being too rigid and of forcing pro-cyclicality in fiscal policy. We test the impact of the SGP rules on the cyclical properties of fiscal policy for a panel of 12 European countries. We conclude that contrary to what might have been expected the euro fiscal rules have reinforced the counter-cyclicality of fiscal policy. However, the results also show that the SGP is not being applied symmetrically over the cycle, leading to insufficient fiscal consolidation during economic upswings. This explains the recent difficulties of Portugal, Germany and France in complying with SGP requirements. Based on these conclusions we argue for the creation of independent national technical committees that would define an appropriate deficit target on an annual basis.Fiscal policy, stabilisation, EMU, Stability and Growth Pact reform.

O Teorema da Equivalência Ricardiana: discussão teórica

A tese ricardiana sustenta que para um dado montante de despesa pública a substituição de impostos por dívida não tem qualquer efeito na procura global nem na taxa de juro. A dívida pública não tem qualquer efeito riqueza, o que faz com que em termos de efeitos na economia o financiamento da despesa pública por dívida seja equivalente ao financiamento por impostos. Só que a equivalência para se verificar necessita da reunião de um conjunto restritivo de condições. É objecto deste texto a sua avaliação crítica. Discute-se ainda a posição de David Ricardo em relação à equivalência ricardiana, concluindo-se que ele nega a sua validade de facto.Publicação co-financiada pela JNIC

Ricardian Equivalence: an Empirical Application to the Portuguese Economy

It is the purpose of this paper to focus on the consequences of the Ricardian offset to the conduct of stabilising fiscal policies. If equivalence prevails there is no scope for effective stabilising fiscal policies. A review of the theoretical requirements of Ricardian equivalence reveals that they are not likely to be fulfilled in practice. However, the brief survey of the empirical applications shows that the published empirical evidence is inconclusive. An empirical application for the Portuguese economy is carried out. The tests are based on reduced-form consumption functions and on the Euler equation approach. The overall results are ambiguous

Fiscal sustainability and the accuracy of macroeconomic forecasts: do supranational forecasts rather than government forecasts make a difference?

Credible fiscal plans that aim at restoring fiscal sustainability will be essential to counter the present increase in debt levels all across Europe. The macroeconomic scenario of such plans will be crucial. This paper assesses whether there is any advantage in delegating (part of) such power to supra-national forecasts. The evidence on the relative performance of the European Commission’s (EC) growth forecast is rather mixed, with considerable variation at the country level. Some national government forecasts (France, Italy, and Portugal) perform worse in terms of descriptive statistics than the EC forecast for all forecast horizons. For the year ahead the EC growth forecast is better than the official forecasts for almost ¾ of the EU-15 countries. All in all, since the EC forecast appears to be a good benchmark, in order to reduce the (optimistic) forecast bias, national governments could be forced to justify any large (optimistic) deviation from this benchmark when presenting their respective national stability and growth programmes

Output Smoothing in EMU and OECD: Can We Forego Government Contribution? A risk sharing approach

This paper analyses the smoothing of asymmetric shocks to output for a sample of OECD countries. The research finds no evidence of large differences in the patterns of risk sharing for the 19 OECD countries, the EU-15 or euro-area countries, for the period 1970-1999. However, there were shown to be considerable differences between the euro-area and the successful monetary union of the USA: the euro-area showed a much lower insurance of asymmetric shocks than the US states. In the US federation, 75% of the asymmetric shocks to output were smoothed in the period 1964-1990. However, in the euro-area only 44% of such shocks were not passed onto consumption in the period 1970-1999. Until increasing economic integration in Europe does not lead to a substantial decrease in the incidence of idiosyncratic shocks, such shocks may impose non-negligible welfare costs. Due to a large contribution from the public sector to risk sharing, especially to smooth out more persistent shocks, it does not seem likely that private capital markets can easily replace the government, in the near future, in providing a sufficient degree of risk sharing in the euro-area. Even if capital markets become as integrated in the euro-area as they were in the US federation in the period 1964-1990, the amount of shocks left unsmoothed will still be 1.8 times larger than in the US federation. As there are no substantial differences between the patterns of risk sharing for the different samples considered, an eventual enlargement of the euro-area to include the UK, Denmark and Sweden is not likely to pose additional risk sharing problems for the euro-zone

Ricardian equivalence, twin deficits, and the Feldstein-Horioka puzzle in Egypt

Egypt has presented important budget imbalances. This paper tries to evaluate whether Egypt's public deficit has had any impact on current account imbalances, examining the validity of the twin-deficit hypothesis for Egypt. We conclude for the presence of a (weak) long-run relationship between the budget deficit and the current account deficit. Yet, we reject the twin-deficit hypothesis: we found evidence in favour of a reverse Granger-causality running from the external deficit to the budget deficit. Further, we conclude against the validity of full Ricardian equivalence in Egypt and present evidence in favour of a high degree of capital mobility.Twin deficits Current account deficit Feldstein-Horioka puzzle Egypt Fiscal policy