Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2002:11:
Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland.

Göran Hjelm and Martin W Johansson

Abstract: Instead of relying on descriptive statistics to evaluate the permanence of a fiscal contraction, this paper suggests that this issue should be studied using tests for structural breaks in cointegrating relationships between taxes and spending. We label a fiscal contraction as 'permanent' if a structural break is detected during the contraction period. Applying Gregory and Hansen's (1996) test on Danish and Irish data and find that the fiscal contraction in Ireland (1987-1989) induced a structural change in fiscal policy while the results from the Danish data do not imply such a regime shift. We discuss possible explanations for this finding

Keywords: Fiscal Policy; Fiscal contraction; Cointegration; Structural breaks; (follow links to similar papers)

JEL-Codes: C22; E62; H30; (follow links to similar papers)

12 pages, March 21, 2002

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