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Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries

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  • Afonso, António
  • Jalles, João Tovar

Abstract

We assess the sustainability of public finances in OECD countries, over the period 1970-2010, using unit root and cointegration analysis, both country and panel based, controlling for endogenous breaks. Results notably show: lack of cointegration – absence of sustainability – between government revenues and expenditures for most countries (except for Austria, Canada, France, Germany, Japan, Netherlands, Sweden, and UK); improvements of the primary balance after past worsening in debt ratios for Australia, Belgium, Germany, Ireland, Netherlands and the UK; Granger causality from government debt to the primary balance for 12 countries (suggesting the existence of Ricardian regimes). Overall, fiscal policy has been less sustainable for several countries, and panel data results corroborate the time-series findings. JEL Classification: C32, E62, H62, H63

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  • Afonso, António & Jalles, João Tovar, 2012. "Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries," Working Paper Series 1465, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20121465
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    More about this item

    Keywords

    breaks; causality; Debt; fiscal regimes; FMOLS; panel cointegration; primary balance; stationarity;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space 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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