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Government Deficits in the European Union: An Analysis of Entry and Exit Dynamics

Author

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  • Ali Bayar
  • Bram Smeets

Abstract

The extent of government deficits and debt has been one of the most debated issues in recent years. However, much less has been contributed about their dynamics. Yet, the issue of entering into and exiting from excessive deficits is critical in the Economic and Monetary Union since the Stability and Growth Pact rules out deficits larger than 3 percent of GDP, unless countries face strictly defined unusual conditions. This paper provides a transition data analysis of the dynamics of public deficits. It shows the asymmetric role played by the economic determinants in these dynamics and estimates the evolution of the probability of entering into and exiting from excessive deficits for every individual member state of the European Union that signed the Maastricht Treaty, since 1970. It also reveals how the concurrence of some minor changes may produce a major switchover in public finance outcomes. Finally, it analyses the evolution over time of the probabilities that countries will enter or escape from the state of having excessive deficit, and hence the fragility of some countries even if they are now out of excessive deficits.

Suggested Citation

  • Ali Bayar & Bram Smeets, 2009. "Government Deficits in the European Union: An Analysis of Entry and Exit Dynamics," CESifo Working Paper Series 2703, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2703
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2703.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. António Afonso & Peter Claeys & Ricardo Sousa, 2011. "Fiscal regime shifts in Portugal," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(2), pages 83-108, August.
    2. Sena Kimm GNANGNON, 2012. "Structural Vulnerability and Excessive Public Indebtedness in CFA Franc Zone Countries," Working Papers 201237, CERDI.
    3. Gnangnon, Sèna Kimm, 2013. "Structural vulnerability and excessive public indebtedness in CFA Franc Zone countries," Economic Modelling, Elsevier, vol. 35(C), pages 816-832.
    4. Yu-Fu Chen & Michael Funke, 2010. "Booms, Recessions And Financial Turmoil: A Fresh Look At Investment Decisions Under Cyclical Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(s1), pages 290-317, July.
    5. Mihai Carp & Andreea Vasiliu, 2010. "The Implications Of Gross Fixed Capital And Unemployment Rate General Government Deficit. Empirical Study At The European Level," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 2(4), pages 61-72, December.

    More about this item

    Keywords

    fiscal policy; Economic and Monetary Union; duration models;

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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