EU Science Hub

Seminar "Stochastic Characterisation of EMU Budget Discipline with Policy Uncertainty"

Feb 22 2017
Feb 22 2017

Wouter van der Wielen, from JRC fiscal policy analysis team, presents his recent research entitled "Stochastic Characterisation of EMU Budget Discipline with Policy Uncertainty".

With the recent debt crisis, the necessity of effective measures for safeguarding fiscal sustainability has become apparent, leading to an intense debate. Most of the debate focuses on restoring fiscal imbalances through strengthening fiscal rules. This presentation addresses two issues impeding the success of these austerity measures: macroeconomic uncertainty and fiscal policy reaction. Specifically, the project applies a structural VAR model to characterise the shocks to growth, inflation and interest rates. In combination with the estimation of fiscal reaction functions, this allows for the derivation of the distribution of fiscal realizations. More than previous studies, the approach models the volatility in fiscal policy. The presented results stress the importance of fiscal policy shocks relative to macroeconomic sources of uncertainty for the volatility in the debt evolution. This may impel the enforcement of stricter surveillance to hedge against disadvantageous outcomes.