PUB - Publikationen an der Universität Bielefeld

This paper studies for the two major Iberian economies, Portugal and Spain, whether they pursue sustainable debt policies based on Bohn (1998)'s idea of a fiscal response mechanism. After presentation and discussion of theoretical reflections on the governmental budget, the empirical estimations are implemented with splines. By accounting for time-varying coefficients it is possible to detect how the fiscal response has been modified or developed over time. The outcome indicates sustainable fiscal behavior based on past observations of about the last 30 years for Portugal and Spain. However, the administration's response to increasing debt ratios has weakened over the years in Portugal and, recently, also in Spain.