Euro Area Time Varying Fiscal Sustainability
ISEG Economics Department Working Paper No. WP 13/2015/DE/UECE
19 Pages Posted: 22 Sep 2015
Date Written: September 14, 2015
Abstract
We assess the time varying features of fiscal sustainability in the euro area via revisiting the empirical relationship between the primary budget surplus and the debt-to-GDP ratio. Focusing on a sample of 11 Euro-area countries between 1999Q1 and 2013Q4 and by means of time series analyses, we find that: i) fiscal policy seems to have been sustainable in Belgium, France, Germany and Netherlands and a Ricardian (monetary dominant) regime might have been present; ii) debt exhibited a negative response following an innovation in the budget surplus in half of the sample; iii) the time-varying coefficient model shows that the 2008-2009 global economic and financial crisis exerted a sizeable negative impact on fiscal sustainability; iv) expenditure-based fiscal rules are strong determinants of fiscal sustainability. All in all, we found some evidence against the Fiscal Theory of the Price Level.
Keywords: fiscal sustainability, causality, impulse response functions, time-varying coefficients, fiscal rules, logistic model
JEL Classification: E62, H62, O52
Suggested Citation: Suggested Citation