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Sustainability of Public Debt and Budget Deficit: Panel cointegration analysis for the European Union Member countries

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Abstract

In this study, we analyse the sustainability of fiscal policy of EU member countries within the panel cointegration and error-correction frameworks. Unlike the previous empirical papers in this area, we apply the test for panel cointegration between the primary budget deficit and the public debt defined in GDP ratios. Based on the cointegration test results, we conclude that the fiscal policy is consistent with the intertemporal budget constraint, i.e., it is sustainable in the panel of fifteen EU member countries over the period from 1970 to 2004. Hence, we show that the fiscal balance exhibits a significant structural change in the year 1992, when we apply the Banerjee and Carrion-i-Silvestre (2006) test for a structural break in the panel cointegration relationship. In a next step, we search for the politico-economic factors which explain the variation in the sustainable fiscal balance among the European countries. We evidence that the European fiscal rules have a significant positive effect on the improvement of the fiscal position of the governments of the EU member countries.

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  • Silika Prohl & Friedrich G. Schneider, 2006. "Sustainability of Public Debt and Budget Deficit: Panel cointegration analysis for the European Union Member countries," Economics working papers 2006-10, Department of Economics, Johannes Kepler University Linz, Austria.
    • Handle: RePEc:jku:econwp:2006_10
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    2. Byrne, Joseph P. & Fiess, Norbert & MacDonald, Ronald, 2011. "The global dimension to fiscal sustainability," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 137-150, June.
    3. Antonio Afonso & Christophe Rault, 2008. "3-Step Analysis of Public Finances Sustainability: the Case of the European Union," Post-Print halshs-00363702, HAL.
    4. Mark J. Holmes & Theodore Panagiotidis & Jesus Otero, 2008. "Are EU budgets stationary?," Discussion Paper Series 2008_07, Department of Economics, University of Macedonia, revised Sep 2008.
    5. Christophe Rault & António Afonso, 2007. "Should we care for structural breaks when assessing fiscal sustainability?," Economics Bulletin, AccessEcon, vol. 3(63), pages 1-9.
    6. Matthieu Llorca & Srdjan Redzepagic, 2008. "Debt sustainability in the EU New Member States: empirical evidence from a panel of eight Central and East European countries," Post-Communist Economies, Taylor & Francis Journals, vol. 20(2), pages 159-172.
    7. António Afonso & Christophe Rault, 2010. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(4), pages 731-755, January.
    8. Mark Holmes & Jesús Otero & Theodore Panagiotidis, 2010. "Are EU budget deficits stationary?," Empirical Economics, Springer, vol. 38(3), pages 767-778, June.
    9. Juan Carlos Cuestas & Karsten Staehr, 2013. "Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe," Applied Economics, Taylor & Francis Journals, vol. 45(22), pages 3211-3219, August.
    10. Campo Robledo, Jacobo, 2011. "Sostenibilidad fiscal: una aproximación con datos panel para 8 países Latinoaméricanos [Fiscal sustainability: A data panel approach for eight Latin American countries]," MPRA Paper 33091, University Library of Munich, Germany.
    11. Baumöhl, Eduard & Výrost, Tomáš & Lyócsa, Štefan, 2011. "Are we able to capture the EU debt crisis? Evidence from PIIGGS countries in panel unit root framework," MPRA Paper 30334, University Library of Munich, Germany.
    12. repec:ebl:ecbull:v:3:y:2007:i:63:p:1-9 is not listed on IDEAS
    13. Benjamin Owusu & Bettina Bökemeier & Alfred Greiner, 2023. "Assessing nonlinearities and heterogeneity in debt sustainability analysis: a panel spline approach," Empirical Economics, Springer, vol. 64(3), pages 1315-1346, March.
    14. Talpos, Ioan & Dima, Bogdan & Mutascu, Mihai & Enache, Cosmin, 2009. "Empirical Evidencies for the Budget Deficits Co-Integration in the Old European Union Members: Are there any Interlinkages in Fiscal Policies?," MPRA Paper 12647, University Library of Munich, Germany.
    15. Tóth G., Csaba, 2014. "The Forecasting Capacity of Indicators Measuring Budget Sustainability," Public Finance Quarterly, Corvinus University of Budapest, vol. 59(4), pages 511-528.
    16. Jacobo Campo-Robledo & Luis Melo-Velandia, 2015. "Sustainability of Latin American fiscal deficits: a panel data approach," Empirical Economics, Springer, vol. 49(3), pages 889-907, November.
    17. Kosta Josifidis & Radmila Dragutinovíc Mitrovíc & Olgica Glavaski & Novica Supíc, 2018. "Public Policies Influence on Fiscal Deficit in the EU-28: Common Correlated Effects Approach," Hacienda Pública Española / Review of Public Economics, IEF, vol. 227(4), pages 63-101, December.
    18. Paul Alagidede & George Tweneboah, 2015. "On the Sustainability and Synchronization of Fiscal Policy in Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 52(2), pages 213-240, November.
    19. Piotr Krajewski & Michał Mackiewicz & Agata Szymańska, 2016. "Fiscal Sustainability in Central and Eastern European Countries - A Post-Crisis Assessment," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(2), pages 175-188.
    20. Abdul Hayy Haziq Mohamad & Muhamad Rias K. V. Zainuddin & Rossazana Ab-Rahim, 2023. "Does Renewable Energy Transition in the USA and China Overcome Environmental Degradation?," International Journal of Energy Economics and Policy, Econjournals, vol. 13(6), pages 234-243, November.
    21. Owusu Benjamin, 2021. "Fiscal Sustainability Hypothesis Test in Central and Eastern Europe: A Panel Data Perspective," Central European Economic Journal, Sciendo, vol. 8(55), pages 285-312, January.
    22. Afonso, António & Rault, Christophe, 2015. "Multi-step analysis of public finances sustainability," Economic Modelling, Elsevier, vol. 48(C), pages 199-209.
    23. Jacobo Campo Robledo & Luis Fernando Melo Velandia, 2011. "How Sustainable are Latin American Fiscal Deficits: A Panel Data Approach," Borradores de Economia 679, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    Sustainability; Budget Deficit; Panel Cointegration; Structural Breaks; Panel error-correction method;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • 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

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