ESTIMATING FISCAL LIMITS: THE CASE OF GREECE
Version of Record online: 18 JUL 2014
Copyright © 2014 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 29, Issue 7, pages 1053–1072, November/December 2014
How to Cite
2014), ESTIMATING FISCAL LIMITS: THE CASE OF GREECE, Journal of Applied Econometrics, 29, pages 1053–1072. DOI: 10.1002/jae.2401, and (
- Issue online: 19 DEC 2014
- Version of Record online: 18 JUL 2014
- Manuscript Accepted: 7 APR 2014
- Manuscript Revised: 27 FEB 2014
- Manuscript Received: 12 DEC 2013
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.