AbstractsEconomics

This doctoral thesis aims to contribute to the ongoing research on fiscal policy and debt sustainability. By employing state-of-the-art econometric techniques, the thesis (i) sheds new light into the factors that can determine fiscal policy behavior and fiscal sustainability, focusing on the interaction of fiscal policy with financial markets, (ii) reassesses the interplay of fiscal policy with the external sector of the economy, and (iii) revisits the timing of successful fiscal retrenchments in an alternative modeling context. The thesis is founded on three independent empirical essays. Each essay contributes to a distinct literature strand. The first essay assesses the sustainability of public finances in the EMU by explicitly accounting for the impact of financial markets on the dynamic fiscal policy reaction function. The aim is to account for the expectations of sovereign debt lenders as regards the ability of the state to finance its obligations, which has not been integrated in relevant studies. Omitting an important interpreting factor of fiscal policy behavior could bias both fiscal sustainability empirical estimates and the underlying implications on public debt dynamics. By employing alternative dynamic panel estimators and incorporating public investors’ expectations, the analysis concludes in favor of public debt stabilization efforts in the EMU over the 1988-2009 period and financial market-based pressure for fiscal improvement.The second essay revisits the role of discretionary fiscal policy actions on current account deficit adjustment episodes in OECD economies. Such episodes that refer to a sizeable improvement of the current account deficit are often associated with increased cost in terms of adjustment in macroeconomic fundamentals. Ιn a recursive discrete choice panel framework, the aim is to assess whether large fiscal contractions can affect the incidence of large current account deficit reversal episodes. Following, the essay investigates the adjustment path of key economic indicators during such reversal episodes, controlling for episodes’ diversity according to the underlying fiscal posture. The econometric estimates put forward that large fiscal consolidations to control an adverse fiscal outlook seem to mitigate pressures for an abrupt external sector adjustment. Also, the drivers of current account deficit adjustments differ according to fiscal contractions and expansions. The third essay proposes an alternative empirical framework to study the timing of historical fiscal consolidations in OECD countries and their effectiveness in mitigating public debt ratio imbalances. By extending the Markov regime switching framework in a panel data context, the analysis controls for the limitations of standard empirical approaches in the relevant literature and identifies endogenously from the data (successful) fiscal adjustment episodes. This modeling approach can perfectly capture the initiation and successful realization of historical fiscal consolidations, expanding the episodes after the 2008…