| | · The index was developed for 10 advanced economies in the European Union using annual data that ranged from 1971 to 2010. And fiscal variables that included the nominal interest rate on public debt, the GDP growth rate, the rate of inflation (i.e. changes in GDP deflator) and the ratio of public debt to GDP. · The model assumes that the government aims at stabilising public debt at the prior year’s level. It calculates the primary balance that stabilises debt and compares it to the current primary balance using the dynamic public debt methodology. · Positive primary gaps indicate fiscal vulnerability. The highest frequency of positive primary gaps indicates normal fiscal vulnerability. · Fiscal severity is any positive primary gap above the upper limit of the normal fiscal vulnerability range. · The study concluded that a country’s fiscal policy is vulnerable if the government’s primary balance that stabilizes debt is more than the ratio of the government’s current primary balance to GDP. |
| | · The study introduces a new framework, namely the V-L-D measure of fiscal vulnerability. The framework comprises two indicators, namely: 1) an indicator of level measuring vulnerability capture through the size of the cyclically adjusted balance and through distance-to-stability and 2) one indicator of dynamic quantifying the vulnerability denoted by the changes in the cyclically adjusted balance and in the public debt to GDP ratios over two consecutive years. · The index was developed for 28 advanced economies in the European Union using annual data that ranged from 1990 to 2013. In a similar way to the · By defining and determining the primary gap (the difference between the current and stabilizing primary balance) the study was able to compute an index of fiscal vulnerability. · The study concluded that a country’s fiscal policy is vulnerable if the government’s primary balance that stabilizes debt is more than the ratio of the government’s current primary balance to GDP. |