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Fiscal Policy Reaction in the Short Term for Assessing Fiscal Sustainability in the Long Runin Central and Eastern European Countries

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Abstract

The aim of this paper is to analyze how the primary government balance in Central and Eastern European countries reacts in the short term, in order to assess fiscal sustainability in the long run. For the purpose of this study, a fiscal reaction function is used. Given the different orders of integration of the variables involved in the model, modified forms of the fiscal reaction function are considered. The results show that for Bulgaria, Czech Republic, Estonia, Hungary, and Lithuania fiscal policy reacts as expected – in the sense that governments have the ability to run a primary surplus – in the short term. This action makes fiscal sustainability easier to achieve in the long run. On the other hand, for Latvia, Poland, Romania, and Slovakia, sustainable fiscal policy will be more difficult to attain given the opposite response of governments to public debt shocks. In these countries, severe fiscal adjustments should be made in order to reach fiscal sustainability in the long run.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 60 (2010)
Issue (Month): 6 (December)
Pages: 501-518

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Handle: RePEc:fau:fauart:v:60:y:2010:i:6:p:501-518

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Keywords: fiscal sustainability; fiscal reaction function; primary balance; public debt; budget balance;

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  1. Christophe Rault & Antonio Alfonso, 2007. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," William Davidson Institute Working Papers Series wp893, William Davidson Institute at the University of Michigan.
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Cited by:
  1. Aleš Melecký & Martin Melecký, 2012. "The Impact of Macroeconomic Shocks on the Government Debt Dynamics: How Robust is the Fiscal Stance of the Czech Republic?," Politická ekonomie, University of Economics, Prague, vol. 2012(6), pages 723-742.
  2. Melecky, Ales & Melecky, Martin, 2012. "Vliv makroekonomických šoků na dynamiku vládního dluhu: jak robustní je fiskální pozice České republiky?
    [The Impact of Macroeconomic Shocks on the Government Debt Dynamics: How Robust is
    ," MPRA Paper 39761, University Library of Munich, Germany.

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