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Fiscal Sustainability from a Nonlinear Framework: Evidence from 14 European Countries

In: Global Issues in Banking and Finance

Author

Listed:
  • Esra Hasdemir

    (University of Turkish Aeronautical Association)

  • Tolga Omay

    (Atilim University)

Abstract

This study examines the fiscal sustainabilityFiscal sustainability of 14 European Union (EU) Member countries in the long run. For this purpose, a linear Augmented Dickey Fuller (ADF) and a variety of nonlinear univariate unit root testsUnit root tests are applied to the debt-to-GDP series of the 14 EU Member countries; Belgium, Czech Republic, Denmark, Finland, France, Greece, Hungary, Italy, Netherlands, Poland, Portugal, Romania, Slovakia and Sweden. In addition to that, the nonlinear unit root testsUnit root tests applied in this study are classified according to the source of nonlinearities: (i) time dependent nonlinearityNonlinearity (structural break(s)), (ii) state dependent nonlinearityNonlinearity and (iii) hybrid nonlinearityNonlinearity. Thus, the nonlinearities and their sources in data generating process of debt-to-GDP series of every country can be determined. The findings of this study show that the null of linear unit root cannot be rejected for none of the countries by applying linear ADF whereas it can be rejected as a result of nonlinear unit root testsUnit root tests for considerable number of countries, i.e. 11 out of 14 countries exhibit time dependent nonlinearityNonlinearity, 6 out of 14 exhibit state dependent nonlinearity and 10 out of 14 exhibit hybrid nonlinearity in their relevant data. So, the source of nonlinearities in the relevant data differs according to the country. That is, for testing the fiscal sustainabilityFiscal sustainability, the nonlinearities in the data need to be taken into account. Ignoring the nonlinearities in the testing procedure can lead misleading results in the decision of fiscal sustainabilityFiscal sustainability in the long run.

Suggested Citation

  • Esra Hasdemir & Tolga Omay, 2019. "Fiscal Sustainability from a Nonlinear Framework: Evidence from 14 European Countries," Springer Proceedings in Business and Economics, in: Nesrin Ozatac & Korhan K. Gokmenoglu (ed.), Global Issues in Banking and Finance, pages 65-81, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-30387-7_6
    DOI: 10.1007/978-3-030-30387-7_6
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    Cited by:

    1. Xie, Zixiong & Chen, Shyh-Wei & Hsieh, Chun-Kuei, 2021. "Facing up to the polysemy of purchasing power parity: New international evidence," Economic Modelling, Elsevier, vol. 98(C), pages 247-265.

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