Temporal Distribution of Regime1
Figure 2: Spain, Fiscal Policy Rule, Temporal Distribution of Regime Probabilities, 1986-2003.
2.3.2 Spain
Figure 2 shows the temporal distribution of the two fiscal regimes for Spain. As indicated by
the regime probabilities, we see a one-time shift in the fiscal regime during the mid-1990s. The
difference between regime 1 and 2 is founded by the size of the constant. All other coefficients as
well as the variance of the error term turned out not to differ across the two regimes. Regime 1
is characterized by a constant, which is almost symmetrically distributed around zero, while the
constant in regime 2 takes on a value of about 1.9 with a strictly positive credible interval. Hence,
regime 2 leads to larger revenue/GDP ratios given everything else. As in the case of Germany
we find a countercyclical behavior of fiscal policy, as indicated by the estimated γY , combined
with a positive reaction of the revenue/GDP ratio to increases in the expenditure/GDP ratio.
The debt/output ratio has also a positive impact on the revenue/output ratio. The estimated
coefficient takes a value of about 0.02 and lies almost exactly between Germany’s regime 1 and
2.
Also the Spanish results suggest that there has been a shift toward a more sustainable fiscal
policy toward the end-1990s. In contrast to Germany this shift seems to be rather permanent,
as depicted in figure 2. The estimated variance of the error terms is considerably larger than in
the case of Germany. This means that in average our policy rule specification (2.1) fits Spanish
data worse than German data. One could interpret this as greater uncertainty in Spain’s fiscal
policy. When bringing the regime switch in 1992 together with the data, we can see that it
occurred simultaneously to the rise in the debt/output ratio. That means that the accumulation
of government debt was caused by a drop in revenues as the substantially smaller constant in
regime 1 suggests. With the regime switch in 1997 toward regime 2 the debt/output ratio starts