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Are Eu Budget Deficits Stationary?

  • Mark J. Holmes

    ()

    (Waikato University Management School, New Zealand)

  • Jesús Otero

    ()

    (Universidad del Rosario, Colombia)

  • Theodore Panagiotidis

    ()

    (University of Macedonia, Greece and The Rimini Center for Economic Analysis, Italy)

In this paper, we test for the stationarity of European Union budget deficits over the period 1971 to 2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (i) the presence of cross-sectional dependence among the countries in the panel and (ii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ an AR-based bootstrap approach that allows us to test the null hypothesis of joint stationarity with endogenously determined structural breaks. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal stationarity over the full sample period irrespective of us allowing for structural breaks. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 17_09.

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Date of creation: Jan 2009
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Handle: RePEc:rim:rimwps:17_09
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  17. Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory 88-03, Federal Reserve Bank of San Francisco.
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  24. Cunado, J. & Gil-Alana, L. A. & Perez de Gracia, F., 2004. "Is the US fiscal deficit sustainable?: A fractionally integrated approach," Journal of Economics and Business, Elsevier, vol. 56(6), pages 501-526.
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