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Membership in the Euro area and fiscal sustainability. Analysis through panel fiscal reaction functions

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  • Cizkowicz, Piotr
  • Rzonca, Andrzej
  • Trzeciakowski, Rafal

Abstract

We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for 12 Euro area member states over the 1970-2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996-2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to lack of sufficient adjustment in government non-investment expenditure and direct taxes. In contrast, in the core member states ,which did not benefit from yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to sovereign debt increased during 1996-2007. It was achieved mainly through pronounced adjustments in government non-investment expenditure. Our findings are in accordance with predictions of theoretical model by Aguiar et al. (2014) and are robust to various changes in modelling approach.

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  • Cizkowicz, Piotr & Rzonca, Andrzej & Trzeciakowski, Rafal, 2015. "Membership in the Euro area and fiscal sustainability. Analysis through panel fiscal reaction functions," MPRA Paper 61560, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:61560
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    13. Kleis, Mischa & Moessinger, Marc-Daniel, 2016. "The long-run effect of fiscal consolidation on economic growth: Evidence from quantitative case studies," ZEW Discussion Papers 16-047, ZEW - Leibniz Centre for European Economic Research, revised 2016.
    14. Beqiraj, Elton & Fedeli, Silvia & Forte, Francesco, 2018. "Public debt sustainability: An empirical study on OECD countries," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 238-248.
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    More about this item

    Keywords

    fiscal reaction function; sovereign bond yields’ convergence; fiscal adjustment composition;
    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
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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