| Summary: | The aim of the paper is to evaluate the long-run sustainability of fiscal policy
in Sweden using a time-varying fiscal reaction function. Sufficient sustainability
conditions are discussed, and it is demonstrated that fiscal sustainability is consistent
with various types of transient fiscal policy and temporary debt expansions.
The fiscal response to the debt-to-income ratio is estimated recursively using
constant gain least squares. The evolution of fiscal policy in Sweden is evaluated
over the period from 1850 to 2014. It is demonstrated that a sustainable fiscal
policy can be an outcome of a long-run process of learning. In this process, fiscal
authorities are forced to adapt their policies to changes in the economic and
political environment. It is concluded that fiscal sustainability should be judged
by the eventual ability of fiscal authorities to stabilise debt rather than by transient
debt dynamics.
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