Intertemporal sustainability of fiscal policies: some tests for European countries

Bravo, Ana Bela Santos; Silvestre, António Luís

doi:10.1016/s0176-2680(02)00103-9

Cited by 95 publications

(63 citation statements)

References 13 publications

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“…Table 3 presents our results. After taking into account the possibility of breaks in the series, we get for the revenues-expenditure relationship, rejections of the null of no cointegration in 9 countries for the ADF* statistic (relatively in line with previous findings); 20 similarly for the balance-(lagged) debt relationship, we reject the null in only 4 countries. In other words, for the period 1970-2010, government expenditures, in half of the countries, exhibited a higher growth rate than public revenues, challenging therefore the hypothesis of fiscal policy sustainability.…”

Section: Country Analysissupporting

confidence: 86%

“…This is rather in line with our results in Table 2.b, where for the case of the US we cannot reject the hypothesis of the absence of cointegration between government spending and revenues. 20 Our results, as most of the results reported in the literature, were obtained without considering additional sources of government revenues: for instance, seignorage and privatization revenues. Additionally, government assets (wealth) should be taken into account to make judgements about the sustainability of public finances (even though data are mostly lacking).…”

Section: Country Analysissupporting

confidence: 73%

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Revisiting Fiscal Sustainability: Panel Cointegration and Structural Breaks in OECD Countries

Afonso

Jalles

2012

SSRN Journal

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AcknowledgementsThe authors are grateful for comments from Artur Lopes and from an anonymous referee of the ECB WP series, from participants at ECB and at ISEG/UTL seminars, and to Roberta De Stefani for research assistance. The opinions expressed herein are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem. António Afonso AbstractWe assess the sustainability of public finances in OECD countries, over the period 1970-2010, using unit root and cointegration analysis, both country and panel based, controlling for endogenous breaks. Results notably show: lack of cointegration -absence of sustainabilitybetween government revenues and expenditures for most countries (except for Austria, Canada, France, Germany, Japan, Netherlands, Sweden, and UK); improvements of the primary balance after past worsening in debt ratios for Australia, Belgium, Germany, Ireland, Netherlands and the UK; Granger causality from government debt to the primary balance for 12 countries (suggesting the existence of Ricardian regimes). Overall, fiscal policy has been less sustainable for several countries, and panel data results corroborate the time-series findings.JEL: C32, E62, H62, H63 Keywords: debt, primary balance, fiscal regimes, stationarity, breaks, causality, panel cointegration, FMOLS 1 Non-technical summaryThe importance of sustainable public finances has received increasing attention particularly in the context and following the 2008-2009 economic and financial crisis. Sustainable fiscal policies can be continued indefinitely without any change in the policy stance, and when the intertemporal government budget constraint holds in present value terms. Conversely, if budgetary imbalances prevail, economic policies at both macro and microeconomic levels will quickly become unsupportable and changes would be required. If such a phenomenon occurs, then fiscal imbalances would imply a need for larger and more painful adjustments for the economy.The main purpose of this paper is to investigate and draw some policy lessons on the sustainability of fiscal policy in a set of 18 OECD countries, using annual data over the period 1970-2010. Besides answering this policy question, we are also interested, among other things, in ascertaining the causal direction between government expenditures and revenues. The causal direction between the two budgetary variables may provide useful insights into how policy makers can manage budget deficits in the future. In our empirical approach we perform a systematic analysis of the stationarity properties of the first-differenced stock of government debt as well as, on the one hand, the relation between government revenues and expenditures and, on the other hand, the relation between primary balances and debt. These approaches provide us with an indirect test on the solvency of public finances in these countries. We conduct this analysis on a country-by-country basis, by means of several time series techniques, for robustness purposes, as well as for the country panel as a...

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Section: Country Analysissupporting

confidence: 86%

Section: Country Analysissupporting

confidence: 73%

Revisiting Fiscal Sustainability: Panel Cointegration and Structural Breaks in OECD Countries

Afonso

Jalles

2012

SSRN Journal

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“…It can be shown that the intertemporal budget constraint does indeed imply a cointegration relationship between revenues and expenditures (see Afonso 2003, Santos Bravo and Silvestre 2002, Trehan and Walsh 1988, Bohn 1998. However, whether this relationship exists for our sample and whether it could explain the observable pattern of economic growth is still an empirical question.…”

Section: 3) Cointegration Of Expenditures and Revenuesmentioning

confidence: 99%

Public finances and long-term growth in Europe: Evidence from a panel data analysis

Romero‐Ávila

Strauch

2008

European Journal of Political Economy

168

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Tables and figures 30 Appendices 43 European Central Bank working paper series 48 Terms of use: Documents in EconStor may E U R O P E A N C E N T R A L B A N K WO R K I N G PA P E R S E R I E S E U R O P E A N C E N T R A L B A N K WO R K I N G PA P E R S E R I E S ECB Working Paper No 246 July 20034 Abstract In Lisbon the European Council proclaimed a European growth strategy. It considers an average economic "growth rate of around 3 percent as a realistic prospect for the coming years" and assigns public finances an important role in the process of achieving this goal. This paper addresses the question whether we can find empirical evidence for European countries that public finance reform affects trend growth. Focusing on time series patterns, we investigate whether there have been persistent shifts or trends in economic growth and fiscal variables over the last 40 years. In addition, we estimate a distributed lag model, which 1) indicates that government consumption and transfers negatively affect growth rates of GDP per capita over the business cycle, while public investment has a positive impact, and 2) provides robust evidence that distortionary taxation affects growth in the medium-term through its impact on the accumulation of private physical capital. Non-technical summaryThe European Council set forth the Lisbon Process in order to raise growth rates of output in EU countries. The Council considers "an average economic growth rate of around 3% [as] a realistic prospect for the coming years" 1 . In a follow-up to the process initiated in Lisbon, the Commission and ECOFIN Council underscored that the quality of public finances plays a crucial role for growth and employment. More specifically, they outlined the necessity of lowering the tax burden and particularly the tax wedge for lowskilled workers, making benefit systems more supportive to employment, shifting resources towards productive expenditures in health, education and physical infrastructure, and ensuring the sustainability of public finances.The conclusions of the European Council on the European output performance leave open whether the increase in economic growth is expected to be persistent. Therefore we investigate in this paper which growth pattern could be the outcome of policy reforms in the future course of the Lisbon process. Analysing past experiences in European countries should indicate whether public finances have the potential to raise growth rates more permanently, ...

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“…The results of his research confirmed the revenue and expenditure cointegration in four countries, of which only Germany had a cointegration vector of [1,-1]. Bravo and Silvestre (2002), by using annual data on 11 EU countries for the period 1960 to 2000, showed that the revenues and expenditures were cointegrated only in 5 countries, often with a cointegration vector other than [1,-1]. Afonso (2004) studied fiscal policy sustainability in 15 EU countries for the period 1970 to 2003 and concluded that a few countries have no problem fulfilling the budgetary constraints.…”

Section: Literature Reviewmentioning

confidence: 69%

Budget Constraint Fulfilment in Some EU Candidate Countries

Jakšić

Ješić

2016

MJE

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One of the crucial fiscal sustainability preconditions is fulfilment of budget constraint. We applied the approach of budget revenue and expenditure cointegration in some EU candidate countries, because of the reliability of this method for the observed countries. This is the first research of this topic in the majority of these countries based on the above-mentioned methodological set. We showed that weak fiscal sustainability is immanent to Serbia. In Albania and Turkey, we could not find budget sustainability evidence. Our results are very important to economic policy makers in these countries, but also are of special concern to EU bodies in the European integration process. This is emphasised because of reported public debt crisis and macroeconomic spillovers in the European Union.

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Intertemporal sustainability of fiscal policies: some tests for European countries

Cited by 95 publications

References 13 publications

Revisiting Fiscal Sustainability: Panel Cointegration and Structural Breaks in OECD Countries

Revisiting Fiscal Sustainability: Panel Cointegration and Structural Breaks in OECD Countries

Public finances and long-term growth in Europe: Evidence from a panel data analysis

Budget Constraint Fulfilment in Some EU Candidate Countries

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