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On the sustainability of government deficits: some long-term evidence for Spain, 1850-2000

  • Oscar Bajo-Rubio

    (Universidad de Castilla-La Mancha)

  • Carmen Díaz-Roldán

    (Universidad de Castilla-La Mancha)

  • Vicente Esteve

    (Universidad de Valencia y Universidad de La Laguna)

We provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, from the estimation of a cointegration relationship between government expenditures and revenues derived from the intertemporal budget constraint. The longer than usual span of the data allows us to obtain more robust results on the fulfilment of the intertemporal budget constraint than most of the previous analyses. Two additional robustness checks are provided. First, we investigate the possibility of structural changes occurring along the period analyzed, using the new approach of Kejriwal and Perron (2008, 2010) to testing for multiple structural changes in cointegrated regression models. Second, we investigate whether the behaviour of fiscal authorities has been non-linear, by means of the procedure of Hansen and Seo (2002) based on a threshold cointegration model. Our results show that (i) the government deficit has been strongly sustainable in the long run, (ii) no evidence is found on any significant structural break throughout the whole period, and (iii) fiscal sustainability has been attained due to the non-linear behaviour of fiscal authorities, which have only acted on the budget deficit when it has exceeded around 4.5% of GDP.

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File URL: http://www.aeefi.com/RePEc/pdf/defi10-03.pdf
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Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 10-03.

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Length: 24 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:aee:wpaper:1003
Contact details of provider: Web page: http://www.aeefi.com
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