An Econometric Policy Evaluation of Fiscal Management in PIGS Economies

In this chapter we propose a non-linear self-exciting threshold autoregressive \(({\text{SETAR}})\) model as a potential econometric framework for evaluating fiscal policy management. Contrary to the previous studies, the results suggest the absence of corrective non-linear fiscal adjustment in the case of Portugal, Italy, Spain, and Greece (PIGS) after the Bretton Woods collapse, which helps to explain a staggering debt build-up in these economies in the last couple of decades. Although our preferred parsimonious \({\text{SETAR}}(2,1,1)\) model estimates are incapable of encompassing large shocks to overall fiscal balances due to the Great Recession and the COVID-19 crisis, policymakers could update and improve the econometric results from this chapter by using real-time fiscal policy measures with the inclusion of structural intervention dummy variables in our preferred baseline \({\text{SETAR}}(2,1,1)\) model specification to quantify significant fiscal outliers due to the Great Recession and the COVID-19 crisis for the PIGS economies between 1971 and 2021.