Assessing long-term fiscal developments: evidence from Portugal

Abstract

We use a Three-Stage Least Square (TSLS) method and a system of equations to recursively estimate two components of fiscal policy – responsiveness and persistence – and to infer about the sources of fiscal deterioration (improvement). The results suggest that (i) government spending exhibits higher persistence than government revenue and (ii) government revenue is more responsive to the business cycle than government spending, pointing to fiscal deterioration issues.

Notes

The opinions expressed are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem.

¹ is the length of the sample window used to initialize the recursive estimation procedure, and we set quarters.

²Other papers using higher frequency data are MacDonald (1992) and Quintos (1995) for the US, Smith and Zin (1991) for Canada and Baglioni and Cherubini (1993) for Italy.