IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v58y2020i4d10.1007_s00181-018-1567-8.html
   My bibliography  Save this article

Sustainability of European fiscal balances: Just a statistical artifact?

Author

Listed:
  • Malte Rengel

    () (Georg-August-University Göttingen)

Abstract

The European debt crisis has emphasized the importance of a reliable assessment of the sustainability of fiscal balances. The literature on policy reaction functions interprets debt as sustainable if a rising debt-to-GDP ratio invokes a positive reaction in the primary surplus. In this study, I show in a panel framework that the persistence of debt-to-GDP ratios and the correlation of respective innovations with primary surpluses generate size distortions of t-tests for common policy reaction coefficients. An analysis of European data prior to 2009 reveals that these size distortions can potentially cause conventional inference techniques to spuriously signal sustainability of fiscal balances. In contrast, size-corrected bootstrap-based critical values allow for a timely detection of increased solvency risk.

Suggested Citation

  • Malte Rengel, 2020. "Sustainability of European fiscal balances: Just a statistical artifact?," Empirical Economics, Springer, vol. 58(4), pages 1681-1712, April.
  • Handle: RePEc:spr:empeco:v:58:y:2020:i:4:d:10.1007_s00181-018-1567-8
    DOI: 10.1007/s00181-018-1567-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00181-018-1567-8
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Matthias Hartmann & Helmut Herwartz, 2012. "Consolidation first - About twin deficits and the causal relation between fiscal budget and current account imbalances," Economics Bulletin, AccessEcon, vol. 32(4), pages 3313-3319.
    2. Carlos Marinheiro, 2006. "The sustainability of Portuguese fiscal policy from a historical perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 33(2), pages 155-179, June.
    3. Mendoza, Enrique G. & Ostry, Jonathan D., 2008. "International evidence on fiscal solvency: Is fiscal policy "responsible"?," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1081-1093, September.
    4. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    5. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
    6. Thompson, Samuel B., 2011. "Simple formulas for standard errors that cluster by both firm and time," Journal of Financial Economics, Elsevier, vol. 99(1), pages 1-10, January.
    7. Christian Gengenbach & Franz C. Palm & Jean-Pierre Urbain, 2010. "Panel Unit Root Tests in the Presence of Cross-Sectional Dependencies: Comparison and Implications for Modelling," Econometric Reviews, Taylor & Francis Journals, vol. 29(2), pages 111-145, April.
    8. Peter Claeys & Raúl Ramos & Jordi Suriñach, 2008. "Fiscal sustainability across government tiers," International Economics and Economic Policy, Springer, vol. 5(1), pages 139-163, July.
    9. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    10. Joakim Westerlund & Paresh Narayan, 2015. "A Random Coefficient Approach to the Predictability of Stock Returns in Panels," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 13(3), pages 605-664.
    11. Herwartz, H. & Siedenburg, F., 2008. "Homogenous panel unit root tests under cross sectional dependence: Finite sample modifications and the wild bootstrap," Computational Statistics & Data Analysis, Elsevier, vol. 53(1), pages 137-150, September.
    12. Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 291-306, August.
    13. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    14. Ant�nio Afonso & João Tovar Jalles, 2015. "Fiscal sustainability: a panel assessment for advanced economies," Applied Economics Letters, Taylor & Francis Journals, vol. 22(11), pages 925-929, July.
    15. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    16. Hjalmarsson, Erik, 2008. "The Stambaugh bias in panel predictive regressions," Finance Research Letters, Elsevier, vol. 5(1), pages 47-58, March.
    17. Campbell, John Y. & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Journal of Financial Economics, Elsevier, vol. 81(1), pages 27-60, July.
    18. Gregory Mankiw, N. & Shapiro, Matthew D., 1985. "Trends, random walks, and tests of the permanent income hypothesis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 165-174, September.
    19. Gregory Mankiw, N. & Shapiro, Matthew D., 1986. "Do we reject too often? : Small sample properties of tests of rational expectations models," Economics Letters, Elsevier, vol. 20(2), pages 139-145.
    20. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, vol. 74(2), pages 209-235, November.
    21. Niklas Potrafke & Markus Reischmann, 2015. "Fiscal Transfers and Fiscal Sustainability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(5), pages 975-1005, August.
    22. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
    23. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
    24. Joakim Westerlund & Hande Karabiyik & Paresh Narayan, 2017. "Testing for Predictability in panels with General Predictors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(3), pages 554-574, April.
    25. Tilak Abeysinghe & Ananda Jayawickrama, 2013. "A segmented trend model to assess fiscal sustainability: The US experience 1929–2009," Empirical Economics, Springer, vol. 44(3), pages 1129-1141, June.
    26. Joakim Westerlund & Silika Prohl, 2010. "Panel cointegration tests of the sustainability hypothesis in rich OECD countries," Applied Economics, Taylor & Francis Journals, vol. 42(11), pages 1355-1364.
    27. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    28. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    29. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-819, September.
    30. Hjalmarsson, Erik, 2010. "Predicting Global Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(1), pages 49-80, February.
    31. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2015. "Scale and skill in active management," Journal of Financial Economics, Elsevier, vol. 116(1), pages 23-45.
    32. Alfred Greiner & Uwe Köller & Willi Semmler, 2007. "Debt sustainability in the European Monetary Union: Theory and empirical evidence for selected countries," Oxford Economic Papers, Oxford University Press, vol. 59(2), pages 194-218, April.
    33. Baglan Deniz & Yoldas Emre, 2016. "Public debt and macroeconomic activity: a predictive analysis for advanced economies," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(3), pages 301-324, June.
    34. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    35. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-271, February.
    36. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
    37. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-218, March.
    38. Helmut Herwartz & Malte Rengel, 2018. "Size-corrected inference in fiscal policy reaction functions: a three country assessment," Empirical Economics, Springer, vol. 55(2), pages 391-416, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Public debt; Sustainability; Panel data; Second-order bias; Wild bootstrap; Predictive regressions;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:58:y:2020:i:4:d:10.1007_s00181-018-1567-8. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.