|Abstract:||We examine the sustainability of fiscal policy in terms of linearity vs. non-linearity of fiscal reaction function, and especially the semi-parametric approaches are employed. Moreover, the threshold of fiscal policy regime switches and the interaction between monetary and fiscal policies are also investigated. Finally, we analyze the determinants of the government arears and delayed payment including institutional and cultural variables.
In Chapter 1, we investigate how the fiscal reaction function is shaped regarding linearity and non-linearity to see if the government exhibits the phenomenon of fiscal fatigue and the existence of debt limit. We newly apply the semi-parametric approaches to 125 advanced and developing countries panel data which is divided into three sub-samples (i.e., low-; middle-; high-income countries). We find that low-income countries have non-linear quadratic functional form, and the high-income countries show non-linear cubic functional relationship. In contrast, the middle-income countries mildly take on linear functional form but have insignificant results. This implies that there is an empirical evidence of fiscal fatigue and debt limit at least among low- and high-income countries. This results are confirmed by traditional parametric approaches.
In Chapter 2, by applying GMM estimation to the quarterly data of the U.S. of 1980-2014, regarding fiscal policy, we find that there is the endogenous threshold at which the government switches from active fiscal policy to passive one. In addition, an increase in policy interest rate decreases the threshold. Meanwhile, at low debt level, an increase in policy interest rate is found to increase primary deficit, but as debt grows sufficiently, a rise in policy interest rate decreases deficit. On the contrary, inflation rate decreases deficit, while, as debt increases enough, an increase in inflation rate induces the government to let spending and deficit to rise. Regarding monetary policy, we show that higher level of government debt tends to lead the central bank to raise policy interest rate. But, primary deficit has ambiguous effect on policy interest rate.
In Chapter 3, from the data of 27 European countries during 1990-2012, we find that the government debt, and the voice and accountability increase the share of arrears, while the natural logarithm of GDP, the government bond rate, the political stability and non-violence, and the rule of law decrease it. In addition, the same determinants of the share of arrears have exactly the opposite effects on the share of acceptable delayed payment. Finally, the government debt and the openness have positive effects on the share of delayed payment, whereas the political stability and non-violence has a negative effect on the share of delayed payment.