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Post-crisis Fiscal Policy$
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Carlo Cottarelli, Philip Gerson, and Abdelhak Senhadji

Print publication date: 2014

Print ISBN-13: 9780262027182

Published to MIT Press Scholarship Online: September 2015

DOI: 10.7551/mitpress/9780262027182.001.0001

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Determinants of the Primary Fiscal Balance: Evidence from a Panel of Countries

Determinants of the Primary Fiscal Balance: Evidence from a Panel of Countries

(p.67) 4 Determinants of the Primary Fiscal Balance: Evidence from a Panel of Countries
Post-crisis Fiscal Policy

Li Zeng

The MIT Press

This chapter examines some stylized facts about the primary fiscal balance, a key determinant of public debt dynamics which, together with the level of the public debt stock and the differential between the interest rate on public debt and GDP growth, forms the basis for projecting the future path of a country's public debt. More specifically, the chapter estimates the empirical relationship between the primary fiscal balance and its underlying determinants using both country fixed-effect and dynamic-panel data methods. It provides an illustrative example showing how to apply the empirical findings to predict a country's primary fiscal balance on the basis of economic fundamentals. While achieving a large primary fiscal surplus is not unusual, sustaining it over an extended period is quite uncommon. The chapter shows that real economic growth has a significant positive impact on the primary fiscal balance, and that countries tend to run higher primary fiscal balances when faced with higher debt-to-GDP ratios.

Keywords:   primary fiscal balance, public debt, GDP growth, fiscal surplus, real economic growth, debt-to-GDP ratio

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