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What do we really know about fiscal sustainability in the EU? A panel data diagonostic

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Author Info
Antonio Afonso () (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
Christophe Rault () (Université d’Orléans, LEO, CNRS, UMR 6221, Rue de Blois-B.P.6739, 45067 Orléans Cedex 2, France.)

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Abstract

We assess the sustainability of public finances in the EU15 over the period 1970-2006 using stationarity and cointegration analysis. Specifically, we use panel unit root tests of the first and second generation allowing in some cases for structural breaks. We also apply modern panel cointegration techniques developed by Pedroni (1999, 2004), generalized by Banerjee and Carrion-i-Silvestre (2006) and Westerlund and Edgerton (2007), to a structural long-run equation between general government expenditures and revenues. While estimations point to fiscal sustainability being an issue in some countries, fiscal policy was sustainable both for the EU15 panel set, and within subperiods (1970-1991 and 1992-2006). JEL Classification: C23, E62, H62, H63.

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Paper provided by European Central Bank in its series Working Paper Series with number 820.

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Length: 56 pages
Date of creation: Oct 2007
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Handle: RePEc:ecb:ecbwps:20070820

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Keywords: Intertemporal budget constraint fiscal sustainability EU panel unit root panel cointegration.

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