Economic and Political Determinants of Budget Deficits in the European Union: A Dynamic Random Coefficient Approach
AbstractThis paper formulates a dynamic Random Coefficient Model (RCM) to consider a set of popular determinants of public deficits in the EU-15 over the period 1971-2006, both at a country-specific level and from a population-wide perspective. Although the extent of government deficits and debt has been one of the most debated macroeconomic issues in recent times, the models trying to capture the explanatory powers driving these deficits typically estimate models that pose the strict assumption of homogeneity on the coefficients over all countries in the model. The sensibility of this assumption will be investigated, with results showing that an increase in the degree of heterogeneity leads to an improvement in the model fit and provides additional information to nuance the effects of the explanatory variables. In this way, the paper exposes a limited degree of partisanship over all countries under consideration, but on the other hand provides evidence for opportunistic behaviour of policymakers in the major part of the sample. The effect of institutional changes following the enforcement of the Maastricht Treaty varies over the countries and is related to the necessity of budgetary consolidation.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2546.
Date of creation: 2009
Date of revision:
fiscal policy; European Monetary Union; Random Coefficient Model; Bayesian Analysis;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
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