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Fiscal Sustainability in EMU contries: A continued Fiscal commitment?

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Jordi Paniagua & Juan Sapena & Cecilio Tamarit, 2016. "Fiscal Sustainability in EMU contries: A continued Fiscal commitment?," Working Papers 1608, Department of Applied Economics II, Universidad de Valencia.
    • Handle: RePEc:eec:wpaper:1608
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    9. María del Carmen Ramos-Herrera & María A. Prats, 2020. "Fiscal Sustainability in the European Countries: A Panel ARDL Approach and a Dynamic Panel Threshold Model," Sustainability, MDPI, vol. 12(20), pages 1-14, October.
    10. Canh Phuc Nguyen & Thanh Dinh Su, 2022. "When ‘uncertainty’ becomes ‘unknown’: Influences of economic uncertainty on the shadow economy," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 93(3), pages 677-716, September.
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    13. Ahmad Hassan Ahmad & Olalekan Bashir Aworinde, 2021. "Fiscal and External Deficits Nexus in GIIPS Countries: Evidence from Parametric and Nonparametric Causality Tests," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 27(3), pages 171-184, August.
    14. Piergallini, Alessandro & Postigliola, Michele, 2020. "Evaluating the sustainability of Italian public finances," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    15. Navarro-Ortiz, Josep & Sapena, Juan, 2020. "Is external debt sustainable? A probabilistic approach," Economic Modelling, Elsevier, vol. 93(C), pages 142-153.
    16. Bashir Olayinka Kolawole, 2021. "Fiscal Stability and Macroeconomic Environment in Nigeria: A Further Assessment," Theory Methodology Practice (TMP), Faculty of Economics, University of Miskolc, vol. 17(02), pages 53-66.
    17. Golpe, Antonio A. & Sánchez-Fuentes, A. Jesus & Vides, José Carlos, 2023. "Fiscal sustainability, monetary policy and economic growth in the Euro Area: In search of the ultimate causal path," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1026-1045.
    18. Park, Danbee & Sung, Taeyoon, 2020. "Foreign debt, global liquidity, and fiscal sustainability," Japan and the World Economy, Elsevier, vol. 54(C).
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    More about this item

    Keywords

    Fiscal sustainability; panel unit root tests; multiple structural breaks; fiscal reaction function; Kalman filter; time-varying parameters;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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