What Do We Really Know About Fiscal Sustainability in the EU? A Panel Data Diagnostic

52 Pages Posted: 26 Feb 2008

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

Christophe Rault

IZA Institute of Labor Economics; University of Orleans; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: February 2008

Abstract

We assess the sustainability of public finances in the EU15 using stationarity and cointegration analysis. Specifically, we use panel unit root tests of the first and second generation allowing in some cases for structural breaks. We also apply modern panel cointegration techniques developed by Pedroni (1999, 2004), generalized by Banerjee and Carrion-i-Silvestre (2006) and Westerlund and Edgerton (2007), to a structural long-run equation between general government expenditures and revenues. While sustainability may be lacking in individual cases, fiscal policy was overall sustainable both for the EU15 panel set, and within some sub-periods.

Keywords: intertemporal budget constraint, fiscal sustainability, EU, panel unit root, panel cointegration

JEL Classification: C23, E62, H62, H63

Suggested Citation

Afonso, António and Rault, Christophe and Rault, Christophe, What Do We Really Know About Fiscal Sustainability in the EU? A Panel Data Diagnostic (February 2008). CESifo Working Paper Series No. 2226, Available at SSRN: https://ssrn.com/abstract=1097509 or http://dx.doi.org/10.2139/ssrn.1097509

António Afonso

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
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Portugal
+351 21 392 5985 (Phone)
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HOME PAGE: http://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

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ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

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REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
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Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

Christophe Rault (Contact Author)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

University of Orleans ( email )

Rue de Blois
BP 6739
LEO, Orleans, Orleans cedex 2 45067
France

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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