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Government Solvency: Revisiting some EMU Countries

Author

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  • Michael G. Arghyrou

  • Kul B Luintel

Abstract

Corsetti and Roubini (1991) reported that the government finances of Greece, Ireland, Italy and the Netherlands did not satisfy the intertemporal budget constraint (IBC). We re-examine this issue by utilizing a new empirical approach and extended data set. Structural shifts, an issue which Corsetti and Roubini were unable to address due to the lack of suitable econometric methods, are tackled. We show that: (i) government finances of all four countries satisfy the IBC and this finding is robust to different time horizons; (ii) multiple structural shifts, most of which correspond to important policy changes, did occur in the fiscal path of these countries; and (iii) the overall effect of structural shifts has been to strengthen the evidence supporting IBC. We also find a clear positive Maastricht effect on IBC.

Suggested Citation

  • Michael G. Arghyrou & Kul B Luintel, 2002. "Government Solvency: Revisiting some EMU Countries," Public Policy Discussion Papers 02-24, Economics and Finance Section, School of Social Sciences, Brunel University.
    • Handle: RePEc:bru:bruppp:02-24
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    File URL: http://www.brunel.ac.uk/329/efwps/02-24.pdf
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    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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