Is the budget deficit sustainable when fiscal policy is non-linear? The case of Spain

Abstract

In this paper we re-examine the long-run sustainability of budget deficits, when fiscal policy is conducted as a nonlinear process. Our empirical methodology makes use of recent developments on threshold cointegration that consider the possibility of a nonlinear relationship between government revenues and expenditures. The analysis is applied to the case of Spain, a country that has recently accomplished an important fiscal consolidation. Overall, our results suggest the presence of significant nonlinear effects in Spanish fiscal policy, so that fiscal authorities would cut deficits only if they are 'large', and assuring their long-run sustainability.

Uk Fiscal Policy Sustainability, 1955–2006*

“…Finally, they find evidence of non‐linear fiscal adjustment, which is consistent with the findings of Bohn (1998), Cipollini (2001), Sarno (2001), Arestis et al . (2004), Bajo‐Rubio et al . (2004, 2006), Chortareas et al .…”

Are fiscal budgets sustainable in South Africa? Evidence from provincial level data

“…Firstlyt, a majority of these studies assume linearity in the cointegration analysis (i.e. Narayan & Nayaran, 2006;Nyamongo et al, 2006;Lusinyan & Thornton, 2007;Ndahiriwe & Gupta, 2010;Ghartey, 2010;Jibao et al, 2012;Baharumshah et al, 2016) a feature which may be oversimplifying the issue (see Bajo-Rubio et al, 2006 andEwing et al, 2006 for a discussion). Secondly, even when nonlinearity has been taken into consideration (i.e.…”

Fiscal deficits under financial pressure and insolvency: Evidence for Italy, Greece and Spain

“…trade tax revenues). The existence of possible asymmetries in the budgetary adjustment process is examined for Greece and Spain in Bajo-Rubio et al (2006, Apergis et al (2012) and Paleologou (2013), and evidence in favour of significant asymmetries is provided.…”