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

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  • Piotr Ciżkowicz
  • Andrzej Rzońca
  • Rafał Trzeciakowski

Abstract

We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for the 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 the lack of sufficient adjustment in the government non-investment expenditure and direct taxes. In contrast, in the core member states, which did not benefit from the yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to sovereign debt increased between 1996 and 2007. This was achieved mainly through pronounced adjustments in the government non-investment expenditure. Our findings are in accordance with the predictions of the theoretical model by Aguiar et al. (2014) and are robust to various changes in the modelling approach.

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  • Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Membership in the Euro area and fiscal sustainability. Analysis through panel fiscal reaction functions," NBP Working Papers 203, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:203
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    15. Katia Berti & Eugeniu Colesnic & Cyril Desponts & Stephanie Pamies & Etienne Sail, 2016. "Fiscal Reaction Functions for European Union Countries," European Economy - Discussion Papers 028, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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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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