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What do we really know about fiscal sustainability in the EU? A panel data diagnostic

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Afonso, António; Rault, Christophe

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Abstract We assess the sustainability of public finances in the EU-15 over the period 1970–2006 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 (Oxf Bull Econ Stat 61(1):653–670, 1999; Econom Theory 20(3):597–625, 2004), generalized by Banerjee and Carrion-i-Silvestre (Cointegration in panel data with breaks and cross-section dependence, European Central Bank, Working Paper 591, 2006) and Westerlund and Edgerton (Econ Lett 97(3):185–190, 2007), to a structural long-run equation between general government expenditures and revenues. While estimations point to fiscal sustainability being an issue in some countries, fiscal policy was sustainable both for the EU-15 panel set, and within sub-periods (1970–1991 and 1992–2006).
Keywords EU
Classification Economic Policy; Public Finance
Free Keywords Intertemporal budget constraint; Fiscal sustainability; Panel unit root; Panel cointegration; C23; E62; H62; H63
Document language English
Publication Year 2009
Page/Pages p. 731-755
Journal Review of World Economics, 145 (2009) 4
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)