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Fiscal sustainability, fiscal reactions, pitfalls and determinants

Author

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  • António Afonso
  • José Carlos Coelho

Abstract

We examine the sustainability of public finances and its determinants for 19 Eurozone countries from 1995 to 2020. We conclude for the existence of panel cointegration between government revenues and expenditures; primary government balance and lagged public debt-to-GDP ratio; and public debt-to-GDP ratio and lagged primary government balance. The estimated fiscal reaction functions suggest the existence of a Ricardian fiscal regime, although there is also evidence of a non-Ricardian fiscal behaviour. Finally, modelling via time-varying coefficients, we find that fiscal sustainability increases with the output gap, fiscal rules indices and current account balances. Inflation and sovereign ratings assigned by the main rating agencies produce mixed results.

Suggested Citation

  • António Afonso & José Carlos Coelho, 2025. "Fiscal sustainability, fiscal reactions, pitfalls and determinants," Applied Economics, Taylor & Francis Journals, vol. 57(26), pages 3560-3571, June.
    • Handle: RePEc:taf:applec:v:57:y:2025:i:26:p:3560-3571
    DOI: 10.1080/00036846.2024.2337808
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    Cited by:

    1. António Afonso & José Alves & Oļegs Matvejevs & Oļegs Tkačevs, 2023. "Fiscal Sustainability and the Role of Inflation," CESifo Working Paper Series 10843, CESifo.
    2. Fir Nejc, 2024. "Assessing Fiscal Sustainability with Panel Unit Root, Cointegration, and Granger Causality Tests: Evidence from the Broader Groups of Countries," Naše gospodarstvo/Our economy, Sciendo, vol. 70(3), pages 1-20.
    3. Afonso, António & Alves, José & Monteiro, Sofia, 2024. "Sovereign risk dynamics in the EU: The time varying relevance of fiscal and external (im)balances," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 94(C).
    4. Sávai, Marianna, 2025. "Költségvetési fenntarthatóság a koronavírus-járvány után. A visegrádi országok adósságdinamikájuk tükrében [Fiscal sustainability based on debt-dynamics: evidence from the Visegrad countries after COVID-19]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 757-776.
    5. Dascher-Preising, Fabienne & Greiner, Alfred, 2023. "Monetary-fiscal policy relations in the euro area: The impact on the primary balance," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 1-9.
    6. António Afonso & José Alves & José Carlos Coelho, 2025. "Determinants of the degree of fiscal sustainability," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 1190-1205, April.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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