Fiscal Policy Reaction Function and Sustainability of Fiscal Policy in Ukraine
a National Bank of Ukraine, Kyiv, Ukraine
Abstract

This study analyzes the fiscal policy reaction function with switching regimes. We use Logistic Smooth Transition Regressions (LSTR) to show that fiscal policy in Ukraine during the study period remained largely in passive mode, switching to active mode during periods of a high output gap and elevated debt-to-GDP ratio. An important finding is that the fiscal policy reaction function is nonlinear. Specifically, the response of fiscal policy to the output gap is asymmetric: fiscal policy is pro-cyclical during periods of economic growth but neutral in recession.

Publication History
Avaliable online 25 June 2017
3420
views
2161
downloads
Full Text
Citation
Cite as: Vdovychenko, A. (2017). Fiscal Policy Reaction Function and Sustainability of Fiscal Policy in Ukraine. Visnyk of the National Bank of Ukraine, 240, 22-35. https://doi.org/10.26531/vnbu2017.240.022
Citation Format

Metrics
References

Abiad, A., Ostry, J. (2005). Primary surpluses and sustainable debt levels in emerging market countries. IMF Policy Discussion Paper, 05/6. Washington: International Monetary Fund.

Bohn, H. (1998). The behavior of U.S. public debt and deficits. Quarterly Journal of Economics, 113(3), 949-963. https://doi.org/10.1162/003355398555793

Bohn, H. (2005). The sustainability of fiscal policy in the United States. CESifo Working Paper Series, 1446.

Bohn, H. (2007). Are stationary and cointegration restrictions really necessary for the intertemporal budget constraint? Journal of Monetary Economics, 54(7), 1837-1847. https://doi.org/10.1016/j.jmoneco.2006.12.012

Budina, N., Wijnbergen, S. (2008). Quantitative approaches to fiscal sustainability analysis: a case study of Turkey since the crisis of 2001. World Bank Economic Review, 23(1), 119-140. https://doi.org/10.1093/wber/lhn011

Burger, P., Marinkov, M. (2012). Fiscal rules and regime-dependent fiscal reaction functions: the South African case. OECD Journal on Budgeting, 12(1), 1-29. https://doi.org/10.1787/budget-12-5k9czxjth7tg

Burger, P., Stuart, I., Jooste, C.,Cuevas, A. (2011). Fiscal sustainability and the fiscal reaction function for South Africa. Working Paper, 11-69. Washington: International Monetary Fund. https://doi.org/10.5089/9781455227105.001

Claeys, P. (2008). Rules, and their effects on fiscal policy in Sweden. Swedish Economic Policy Review, 15(1), 7-48.

de Mello, L. (2005). Estimating a fiscal reaction function: the case of debt sustainability in Brazil. Working Papers, 423. OECD Economics Department. https://doi.org/10.1787/556325773018

Favero, C., Marcellino, M. (2005). Modelling and forecasting fiscal variables for the Euro area. Oxford Bulletin of Economics and Statistics, 67(1), 755-783. https://doi.org/10.1111/j.1468-0084.2005.00140.x

Favero, C., Monacelli, T. (2005). Fiscal policy rules and regime (in) stability: evidence from the U.S. Working Paper, 282. IGIER.

Gali, J., Perotti, R. (2003). Fiscal policy and monetary integration in Europe. Discussion Paper, 3933. CEPR.

Ghosh, A., Kim, J., Mendoza, E., Ostry, J., Qureshiet, M. (2013). Fiscal fatigue, fiscal space and debt sustainability in advanced economies. Economic Journal, 123(566), F4-F30. https://doi.org/10.1111/ecoj.12010

IMF (2015). Fiscal monitor – now is the time: fiscal policies for sustainable growth.

Leeper, E. (1991). Equilibria under active and passive monetary and fiscal policies. Journal of Monetary Economics, 27(1), 129-147. https://doi.org/10.1016/0304-3932(91)90007-B

Legrenzi, G., Milas, C. (2013). Modelling the fiscal reaction functions of the GIPS based on state-varying thresholds. Economics Letters, 121(3), 384-389. https://doi.org/10.1016/j.econlet.2013.09.011

Mendoza, E., Ostry, J. (2007). International evidence on fiscal solvency: Is fiscal policy "responsible"? Working Paper, 12947. Cambridge: National Bureau of Economic Research. https://doi.org/10.3386/w12947

Penalver, A., Thwaites, G. (2006). Fiscal rules for debt sustainability in emerging markets: the impact of volatility and default risk. Working Paper, 307. Bank of England. https://doi.org/10.2139/ssrn.933299

Teräsvirta, T. (1994). Specification, estimation, and evaluation of smooth transition autoregressive models, Journal of the American Statistical Association, 89(425), 208-218. https://doi.org/10.1080/01621459.1994.10476462

Teräsvirta, T. (1998). Modeling economic relationships with smooth transition regressions. In: Handbook of Applied Economic Statistics, A. Ullah and D. E. Giles, eds. New York: Dekker.

Teräsvirta, T. (2004). Smooth transition regression modeling. In: Applied Time Series Econometrics, H. Lütkepohl, and M. Krätzig, eds. Cambridge University Press. https://doi.org/10.1017/CBO9780511606885.007

Rights and Permissions
This work is licensed under a Creative Commons Attribution 4.0 International License. The images or other third party material in this article are included in the article’s Creative Commons license, unless indicated otherwise in the credit line; if the material is not included under the Creative Commons license, users will need to obtain permission from the license holder to reproduce the material.
Submit Your Paper