What do we really know about fiscal sustainability

Authors: António Afonso Christophe Rault

Publish Date: 2009/11/06

Volume: 145, Issue: 4, Pages: 731-755

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Abstract

We assess the sustainability of public finances in the EU15 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 611653–670 1999 Econom Theory 203597–625 2004 generalized by Banerjee and CarrioniSilvestre Cointegration in panel data with breaks and crosssection dependence European Central Bank Working Paper 591 2006 and Westerlund and Edgerton Econ Lett 973185–190 2007 to a structural longrun 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 EU15 panel set and within subperiods 1970–1991 and 1992–2006We are grateful to Ad van Riet Jürgen von Hagen participants at the 10th Banca d’Italia Public Finance Workshop Perugia at the 2008 EcoMod International Conference on Policy Modeling Berlin and to an anonymous referee for helpful comments and suggestions and to Simone Ruiz for assistance with the data The opinions expressed herein are those of the authors and do not necessarily reflect those of the European Central Bank or the Eurosystem Christophe Rault thanks the Fiscal Policies Division of the ECB for its hospitality UECE is supported by FCT Fundação para a Ciência e a Tecnologia Portugal financed by ERDF and Portuguese funds

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