Fiscal responsiveness to public debt: an analysis of the uncertainty of regional debt limits in Spain

== Abstract ==

<p>The present analysis addresses the primary balance response to the debt of the Spanish Autonomous Communities (ACs) from 1987 to 2015. Overall, the results of this study provide evidence on a nonlinear relationship, which point to a situation of fiscal fatigue and reduced fiscal space. The empirical framework builds mainly on the works of Bohn (1998) and Gosh <em>et al.</em> (2013), thereby focusing also on uncertainty issues. In 2015 the debt ratio stood at 26.8% of ACs&rsquo; Gross Value Added, slightly above our estimates for the lower limit (24%) and well below the upper limit (36%). These results have a backward-looking orientation, that is, fiscal reaction for the coming years is not necessarily determined by past behaviour. That being said, a reduced fiscal space of ACs calls for measures to ensure a sustainable debt trajectory and regain some room to deal with potential negative shocks.</p>