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How to assess debt sustainability? Some theory and empirical evidence for selected euro area countries

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  • Bettina Fincke
  • Alfred Greiner
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    Abstract

    In this article we elaborate on the test proposed by Bohn (1998) that suggests to study whether the primary surplus relative to Gross Domestic Product (GDP) is a positive function of the public debt to GDP ratio in order to detect whether debt policies are sustainable. We argue that this should be complemented by additional tests for countries with rising debt to GDP ratios. We, then, apply that test to some countries of the euro area. In addition, we perform stationarity tests with respect to the real deficit inclusive of interest payments in order to gain additional insight. We conclude that there is empirical evidence that the chosen paths of fiscal policies are sustainable for the countries we consider, although there are country specific differences in debt policies.

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    File URL: http://hdl.handle.net/10.1080/00036846.2011.581213
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 44 (2012)
    Issue (Month): 28 (October)
    Pages: 3717-3724

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    Handle: RePEc:taf:applec:44:y:2012:i:28:p:3717-3724

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    Cited by:
    1. Niklas Potrafke & Markus Reischmann, 2012. "Fiscal Equalization Schemes and Fiscal Sustainability," Ifo Working Paper Series Ifo Working Paper No. 141, Ifo Institute for Economic Research at the University of Munich.
    2. Niklas Potrafke & Markus Reischmann, 2014. "Fiscal Transfers and Fiscal Sustainability," CESifo Working Paper Series 4716, CESifo Group Munich.
    3. María Lorena Marí del Cristo & Marta Gómez-Puig, 2013. "“Fiscal sustainability and fiscal shocks in a dollarized and oil-exporting country: Ecuador”," IREA Working Papers 201306, University of Barcelona, Research Institute of Applied Economics, revised Apr 2013.

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