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459 - Stochastic debt simulation using VAR models and a panel fiscal reaction function – results for a selected number of countries

João Medeiros (European Commission)

Stochastic debt simulation using VAR models and a panel fiscal reaction function – results for a selected number of countriespdf(2 MB) Choose translations of the previous link  

Summary for non-specialistspdf(167 kB) Choose translations of the previous link 


This study uses vector auto-regression (VAR) models and a panel fiscal reaction function (FRF) to simulate debt ratios for fifteen EU Member States according to four regimes which are the product of the type of errors (normal or bootstrapped) with the assumption on the structural primary balance (unchanged or determined by a panel FRF). This methodology should be used to make probabilistic assessments on the debt ratio rather than for providing point estimates. Results suggest that debt ratio paths are not normally distributed being positively skewed, and; primary balances show "fiscal fatigue" and partial mean reversion to historical trends. Debt sustainability scenarios should also be run using a FRF or some equivalent "mean reversion" hypothesis.

(European Economy. Economic Papers. 459. July 2012. Brussels. PDF. 33pp. Tab. Graph. Ann. Free.)

KC-AI-12-459-EN-N (online)
ISBN 978-92-79-22980-0 (online)
doi:10.2765/26702 (online)

JEL classification: C53, E37, H68

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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