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Are the Greek budget deficits too large?

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  • Stilianos Fountas
  • Jyh-Lin Wu

Abstract

We use a residual-based cointegration test suggested by Gregory and Hansen that allows for the determination of a structural break in the cointegration vector to test for the sustainability of Greek fiscal deficits over the 1958-92 period. This relatively recent test leads to a different result from that derived from standard Engle-Granger cointegration tests. The use of the conventional Engle-Granger test implies no cointegration between tax revenues and interest-inclusive government expenditures. On the other hand, using the Gregory-Hansen test we conclude that tax revenues and interest-inclusive government expenditures are cointegrated and a structural break in the cointegrating vector took place in either 1981 or 1983. Our result of cointegration with a structural break is consistent with a strict interpretation of the government's intertemporal budget constraint since it implies a zero discounted value of the public debt. However, since the cointegration-regression slope parameter is significantly less than one (when tax revenues are regressed on expenditure), the undiscounted value of the public debt is different from zero. This means that the government has incentives to default on its debt and, therefore, Greek budget deficit policy is not sustainable.

Suggested Citation

  • Stilianos Fountas & Jyh-Lin Wu, 1996. "Are the Greek budget deficits too large?," Applied Economics Letters, Taylor & Francis Journals, vol. 3(7), pages 487-490.
    • Handle: RePEc:taf:apeclt:v:3:y:1996:i:7:p:487-490
    DOI: 10.1080/758540812
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    1. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    2. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    3. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, vol. 56(6), pages 1397-1417, November.
    4. Haug, Alfred A, 1991. "Cointegration and Government Borrowing Constraints: Evidence for the United States," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(1), pages 97-101, January.
    5. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
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    Cited by:

    1. Munawar-Shah, Syed & Abdul-Majid, Mariani & Hussain-Shah, Syed, 2014. "Assessing Fiscal Sustainability for SAARC and IMT-GT Countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 5(2), pages 26-40.
    2. Maria do Rosario Correia & Reinhard Neck & Theodore Panagiotidis & Christian Richter, 2008. "An empirical investigation of the sustainability of the public deficit in Portugal," International Economics and Economic Policy, Springer, vol. 5(1), pages 209-223, July.

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    More about this item

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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