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Sustainability of Portuguese Fiscal Policy in Historical Perspective

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  • Carlos Marinheiro

    ()
    (GEMF and Faculdade de Economia, Universidade de Coimbra)

Abstract

This paper analyses the sustainability of Portuguese public finances, making use of a long dataset with more than a full century of observations. The use of such a long dataset is appropriate because both unit root and cointegration tests require a long period of data. The sustainability testing procedure is based on unit root and cointegration tests. We find considerable evidence in favour of sustainability for the 1903-2003 period. The overall conclusion of sustainability for the 1903-2003 period is not maintained for the more recent 1975-2003 period, which is characterised by the largest GDP deficit ratios of our sample. This latter period appears to signal a shift to an unsustainable path in Portuguese fiscal policy. Hence, our results suggest that fiscal consolidation efforts must, in fact, be continued in Portugal.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2005-01.

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Length: 37 pages
Date of creation: 2005
Date of revision:
Publication status: Published in Empirica, 33(2-3): 155-179, 2006.
Handle: RePEc:gmf:wpaper:2005-01

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Keywords: Fiscal sustainability; sustainability of public debt; intertemporal budget constraint; government deficits and debt; Portugal;

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  1. Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(4), pages 409-17, October.
  2. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers, Michigan State - Econometrics and Economic Theory 8905, Michigan State - Econometrics and Economic Theory.
  3. Esteves, Rui Pedro, 2003. "Looking ahead from the past: The inter-temporal sustainability of Portuguese finances, 1854 1910," European Review of Economic History, Cambridge University Press, Cambridge University Press, vol. 7(02), pages 239-266, August.
  4. James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
  5. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 03-91, Wharton School Rodney L. White Center for Financial Research.
  6. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 8633, Universite de Montreal, Departement de sciences economiques.
  7. Bravo, Ana Bela Santos & Silvestre, Antonio Luis, 2002. "Intertemporal sustainability of fiscal policies: some tests for European countries," European Journal of Political Economy, Elsevier, Elsevier, vol. 18(3), pages 517-528, September.
  8. Bohn, Henning, 1991. "Budget balance through revenue or spending adjustments? : Some historical evidence for the United States," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(3), pages 333-359, June.
  9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  10. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 99-126, January.
  11. Nigel Andrew Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers, International Monetary Fund 00/81, International Monetary Fund.
  12. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 949-963, August.
  13. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 29(3), pages 429-45, July.
  14. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
  15. John T . Addison & Paulino Teixeira, 2001. "Technology, Employment and Wages," LABOUR, CEIS, CEIS, vol. 15(2), pages 191-219, 06.
  16. Hansen, Peter Reinhard, 2003. "Structural changes in the cointegrated vector autoregressive model," Journal of Econometrics, Elsevier, Elsevier, vol. 114(2), pages 261-295, June.
  17. Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 88-03, Federal Reserve Bank of San Francisco.
  18. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2000/12, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  19. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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Cited by:
  1. Ricardo M. Sousa & António Afonso, 2009. "The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis," NIPE Working Papers, NIPE - Universidade do Minho 3/2009, NIPE - Universidade do Minho.
  2. António Afonso & Peter Claeys & Ricardo M. Sousa, 2009. "Fiscal Regime Shifts in Portugal," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2009/39, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  3. Jasper Lukkezen & Hugo Rojas-Romagosa, 2012. "When is debt sustainable?," CPB Discussion Paper, CPB Netherlands Bureau for Economic Policy Analysis 212, CPB Netherlands Bureau for Economic Policy Analysis.

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