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Fiscal Sustainability in EMU contries: A continued Fiscal commitment?

Listed author(s):
  • Jordi Paniagua

    (Catholic University of Valencia, Faculty of Economics and Business. 34 Calle Corona, Valencia, Spain)

  • Juan Sapena

    (Catholic University of Valencia, Faculty of Economics and Business. 34 Calle Corona, Valencia, Spain)

  • Cecilio Tamarit

    (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain)

The aim of this paper is to study the sustainability of public finances in the Eurozone particularly after the 2007 financial crisis. This paper goes beyond the standard analysis of the univariate properties of the fiscal variables with multiple structural breaks by estimating a time-varying scal reaction function on a 11-country panel for a period spanning from 1970 to 2014. Even if panel unit root or stationary tests can provid a rough first insight on the sustainability of the public finances, they fail to highlight the adjusting mechanisms to debt overhang in recent years. The main advantage of our empirical approach is that it clearly captures governments' dynamic response to debt accumulation, which signals its commitment to readjust public debt towards a sustainable path. Time-varying estimates of the fiscal reaction function sheds new light on this respect and reveal certain heterogeneity among EMU countries on the way they manage their public finances. This paper helps ascertain whether the public resources destined to bail out troubled countries triggered efective fiscal responses.

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File URL: ftp://147.156.210.157/RePEc/pdf/eec_1608.pdf
File Function: First version, 2016
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Paper provided by Department of Applied Economics II, Universidad de Valencia in its series Working Papers with number 1608.

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Date of creation: Dec 2016
Handle: RePEc:eec:wpaper:1608
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