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3-step analysis of public finances sustainability - the case of the European Union

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Author Info
António Afonso () (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Christophe Rault () (Université d’Orléans, LEO, CNRS, UMR 6221, Rue de Blois-B.P.6739, 45067 Orléans Cedex 2, France; IZA, Germany; and William Davidson Institute at the University of Michigan, Ann Arbor, Michigan, 48109, USA.)

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Abstract

We use a 3-step analysis to assess the sustainability of public finances in the EU27. Firstly, we perform the SURADF specific panel unit root test to investigate the meanreverting behaviour of general government expenditure and revenue ratios. Secondly, we apply the bootstrap panel cointegration techniques that account for the time series and cross-sectional dependencies of the regression error. Thirdly, we check for a structural long-run equation between general government expenditures and revenues via SUR analysis. While results imply that public finances were not unsustainable for the EU panel, fiscal sustainability is an issue in most countries, with a below unit estimated coefficient of expenditure in the cointegration relation with revenue as the dependent variable. JEL Classification: C23, E62, H62.

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Paper provided by European Central Bank in its series Working Paper Series with number 908.

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Length: 46 pages
Date of creation: Jun 2008
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Handle: RePEc:ecb:ecbwps:20080908

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Keywords: Fiscal sustainability; EU; panel cointegration.;

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  1. António Afonso, 2009. "Neck, R. and Sturm, J.-E. (eds.): Sustainability of public debt," Journal of Economics, Springer, vol. 97(1), pages 95-96, May. [Downloadable!] (restricted)
  2. António Afonso & Luca Agnello & Davide Furceri & Ricardo M. Sousa, 2009. "Assessing Long-Term Fiscal Developments: a New Approach," Working Papers 2009/19, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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