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Sustainability of EU public finances

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  • Fernando C. Ballabriga
  • Carlos Martinez-Mongay
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    Abstract

    We use a policy rule framework and focus on the response of the primary surplus to accumulated public debt to test a sufficient condition for sustainability. The evidence we report suggests that sustainability was prevalent in many EU countries before Maastricht, but also that the Maastricht impulse induced the shift towards sustainability in some of them. Additionally, although a clear distinction emerges in terms of the visibility of the Maastricht stress between the euro bloc, on the one hand, and the non-euro EU countries, the US and Japan, on the other, there is no evidence of bloc differences in terms of the long term soundness of public finances. On the basis of our analysis and results, we highlight the potential policy relevance of the reaction of the primary surplus to accumulated debt in the debate on the proper balance between fiscal stabilization and discipline in EMU.

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    File URL: http://ec.europa.eu/economy_finance/publications/publication672_en.pdf
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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 225.

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    Length: 30 pages
    Date of creation: Apr 2005
    Date of revision:
    Handle: RePEc:euf:ecopap:0225

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    Keywords: Stability and Growth Pact; public debt; sustainability; Maastricht; fiscal stabilization; accumulated debt; public finances; sustainability; Ballabriga; Martinez-Mongay;

    References

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    1. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
    2. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
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    Citations

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    Cited by:
    1. Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2007. "Deficit sustainability and inflation in EMU: An analysis from the fiscal theory of the price level," Working Papers 07-01, Asociación Española de Economía y Finanzas Internacionales.
    2. Peter Claeys & Raúl Ramos & Jordi Suriñach, 2007. "Fiscal Sustainability Across Government Tiers," Working Papers XREAP2007-14, Xarxa de Referència en Economia Aplicada (XREAP), revised 2007.
    3. António Afonso, 2005. "Ricardian Fiscal Regimes in the European Union," Working Papers Department of Economics 2005/18, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    4. Peter Wierts, 2007. "The sustainability of euro area debt: a re-assessment," DNB Working Papers 134, Netherlands Central Bank, Research Department.
    5. Sébastien Pommier, 2008. "The Use of Fiscal Policy in EMU: First Appraisal and Future Prospects," EKONOMIAZ, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 69(03), pages 28-45.
    6. Greiner, Alfred & Kauermann, Göran, 2008. "Debt policy in euro area countries: Evidence for Germany and Italy using penalized spline smoothing," Economic Modelling, Elsevier, vol. 25(6), pages 1144-1154, November.
    7. Philipp Paulus, 2006. "The final blow to the Stability Pact? EMU enlargement and government debt," Otto-Wolff-Institut Discussion Paper Series 03/2006, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
    8. Silika Prohl & Friedrich G. Schneider, 2006. "Sustainability of Public Debt and Budget Deficit: Panel cointegration analysis for the European Union Member countries," Economics working papers 2006-10, Department of Economics, Johannes Kepler University Linz, Austria.

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