Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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
Additional contact information
Göran Hjelm: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Martin W Johansson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: C22; E62; H30

12 pages, March 21, 2002

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