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ESTIMATING FISCAL LIMITS: THE CASE OF GREECE
Author(s) -
Bi Huixin,
Traum Nora
Publication year - 2014
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2401
Subject(s) - econometrics , particle filter , economics , business cycle , interest rate , bayesian probability , range (aeronautics) , inference , bayesian inference , nonlinear system , path (computing) , debt , monetary economics , statistics , computer science , macroeconomics , kalman filter , mathematics , engineering , artificial intelligence , programming language , aerospace engineering , physics , quantum mechanics
SUMMARY This paper uses Bayesian methods to estimate a real business cycle model that allows for interactions among fiscal policy instruments, the stochastic ‘fiscal limit’ and sovereign default. Using the particle filter to perform likelihood‐based inference, we estimate the full nonlinear model with post‐EMU data until 2010:Q4. We find that (i) the probability of default on Greek debt was in the range of 5–10% in 2010:Q4 and (ii) the 2011 surge in the Greek real interest rate is within model forecast bands. The results suggest that a nonlinear rational expectations environment can account for the Greek interest rate path. Copyright © 2014 John Wiley & Sons, Ltd.