A Simple Public Debt Dynamic Model for Assessing Fiscal Vulnerability: Empirical Evidence for EU Countries

Abstract

There is a large body of research showing that fiscal policy confronted growing challenges over the last decades. The increasing public debt along with population ageing made fiscal policy more vulnerable, in the sense of having some exposure to liquidity and/or solvency risks. In this context, the question arises on how to assess fiscal vulnerability as to signal government to adjust the policy and to restore it to the ‘good’ path. The aim of this paper is to introduce a new methodology of assessing fiscal vulnerability based on a simple dynamic model of public debt. Using annual data ranged on 1970-2012 for all European Union countries, the results show the moments when fiscal policy was vulnerable.