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Government Solvency: Revisiting some EMU Countries

  • Michael G. Arghyrou


  • Kul B Luintel


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.

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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 02-24.

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Length: 19 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:bru:bruppp:02-24
Contact details of provider: Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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  1. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
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  10. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122 National Bureau of Economic Research, Inc.
  11. Philip Arestis & Andrea Cipollini & Bassam Fattouh, 2004. "Threshold Effects in the U.S. Budget Deficit," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 214-222, April.
  12. Bajo-Rubio, Oscar & Diaz-Roldan, Carmen & Esteve, Vicente, 2004. "Searching for threshold effects in the evolution of budget deficits: an application to the Spanish case," Economics Letters, Elsevier, vol. 82(2), pages 239-243, February.
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