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Are EU budgets stationary?

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Abstract

In this paper, we test for the stationarity of European Union budget deficits over the period 1971 to 2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (i) the presence of cross-sectional dependence among the countries in the panel and (ii) the identification of potential structural break s that might have occurred at different points in time. To address these concerns, we employ an AR-based bootstrap approach that allows us to test the null hypothesis of joint stationarity with endogenously determined structural breaks. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal stationarity over the full sample period irrespective of us allowing for structural breaks. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.

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Bibliographic Info

Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2008_07.

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Date of creation: Sep 2008
Date of revision: Sep 2008
Handle: RePEc:mcd:mcddps:2008_07

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Web page: http://www.uom.gr/index.php?tmima=3

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Keywords: Heterogeneous dynamic panels; fiscal sustainability; mean reversion; panel stationarity test.;

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