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Membership in the Euro area and fiscal sustainability - Analysis through panel fiscal reaction functions

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  • Piotr Ciżkowicz

    () (Warsaw School of Economics)

  • Andrzej Rzońca

    () (Warsaw School of Economics)

  • Rafał Trzeciakowski

    () (Warsaw School of Economics)

Abstract

We estimate various panel fiscal reaction functions, including those of main categories of general government revenue and expenditure for 12 Euro area member states over the 1970-2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996-2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to lack of sufficient adjustment in government non-investment expenditure and direct taxes. In contrast, in the core member states ,which did not benefit from yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to sovereign debt increased during 1996-2007. It was achieved mainly through pronounced adjustments in government non-investment expenditure. Our findings are in accordance with predictions of theoretical model by Aguiar et al. (2014) and are robust to various changes in modelling approach.

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  • Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Membership in the Euro area and fiscal sustainability - Analysis through panel fiscal reaction functions," a/ Working Papers Series 1501, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
  • Handle: RePEc:ais:wpaper:1501
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    1. Friedrich Heinemann & Theocharis Grigoriadis, 2016. "Origins of reform resistance and the Southern European regime," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(4), pages 661-691, November.
    2. repec:eee:ecmode:v:64:y:2017:i:c:p:524-538 is not listed on IDEAS
    3. Andrzej Rzoñca & Aleksander £aszek & Andrzej Halesiak, 2016. "On Economic Growth in Europe, or, The Uncertain Growth Prospects of Western Countries," mBank - CASE Seminar Proceedings 144, CASE-Center for Social and Economic Research.

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    Keywords

    fiscal reaction function; sovereign bond yields’ convergence; fiscal adjustment composition.;

    JEL classification:

    • 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
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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