Testing fiscal sustainability in Poland: a Bayesian analysis of cointegration

Fiscal sustainability is a central topic for most of the transition economies of Eastern Europe. This paper focuses on a particular country: Poland. The main purpose is to investigate, empirically, whether the post-transition fiscal policy is consistent with the intertemporal budget constraint, used as a formal theorical framework. To test debt stabilization, the empirical analysis is made in two steps, in which different inferential approaches are adopted. In the first step we perform the preliminary unit roots analysis and the selection of the cointegration rank using parametric and bootstrap procedures. In the second step we apply Bayesian inference to the estimation of the cointegrating vector and of the adjustment parameters. In this way, we experiment the usefulness of Bayesian inference in precisely assessing the magnitude of the cointegrating vector. Moreover, we show to what extent the likehood of the data is important in revising the available prior information, relying on numerical integration techniques.