Comment

Abstract

Table 1 (from Favero, Giavazzi, and Perego 2012) illustrates the extent to which fi scal policy reacts to fl uctuations in the (lagged) debt/GDP ratio. The table reports the estimated coeffi cients on the debt/GDP ratio in the fi scal reaction function of eight OECD countries (the data are annual and extend from 1978 to 2009). Debt stabilization plays a role in all countries, as the difference between the feedback coeffi cients on taxes and government spending implies a positive feedback of the primary surplus to the debt to GDP ratio, with Japan as the only exception. The style of stabilization is, however, heterogenous across countries: lagged debt impacts more signifi cantly (with a negative sign) on expenditures in Canada, the United Kingdom, and in the United States, while it has instead a borderline signifi cant (positive) coeffi cient on taxes in France. Italian fi scal policy reacts to fl uctuations in the debt/GDP ratio by adjusting both taxes and spending. The authors assume that “the costs of changing the tax rates and their enforcement are high relative to the lower political costs of changing the public debt/GDP and the fi scal defi cit/GDP. The tax base depends on structural factors that are harder to modify in the short run than adjusting government expenditure.” They thus contend that “the tax revenue as a share of the GDP provides a more effi cient way of normalizing macro public fi nance data [because] the public debt/GDP normalized by the de facto tax base measures the average tax years that it would take to ‘buy’ the outstanding public debt, and provides a stock measure of public debt overhang.” The results in table 1 show that some countries—Italy, and to some extent France, in our sample—do instead adjust taxes. Others use changes in government spending, a variable that the authors implicitly assume to remain constant. Thus, while the authors address a very interesting issue—the sources