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

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 (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 estimations point to fiscal sustainability being an issue in some countries, fiscal policy was sustainable both for the EU15 panel set, and within sub-periods (1970-1991 and 1992-2006)http://deepblue.lib.umich.edu/bitstream/2027.42/64361/1/wp893.pd

Disturbing the fiscal theory of the price level: Can it fit the eu-15?

With the fiscal theory of the price level (FTPL), Leeper-Sims-Woodford (LSW) argued that the government budget constraint plays a key role in determining the price level. Indeed, there could even be a dispute vis-à-vis the role of monetary policy in the formation of the price level. Apart from several theoretical criticisms, also addressed in the discussion given in this paper, the attempts to validate empirically the novel theory are, so far, rather sparse. Therefore, one of the purposes of this paper is to tentatively assess the possible empirical evidence, concerning the FTPL, for the EU-15 countries.Fiscal theory of the price level; fiscal policy; EU-15; panel data models

Fiscal policy sustainability: some unpleasant European evidence

The sustainability of fiscal deficits has been receiving increasing attention from economists. The issue is paramount for the newly formed Euro area and this is one of the motivations of the paper. In order to assess the sustainability of budget deficits in the Euro area, stationarity tests for the stock of public debt and co-integration tests between public expenditures and public revenues are performed for the Euro countries for the 1968-1997 period. The empirical results allow us to conclude that fiscal policy may not be sustainable for most countries with the possible exceptions of Germany, Austria and the Netherlands.Deficit finance; inter-temporal budget constraint; fiscal policy sustainability; Euro area

Ricardian Fiscal Regimes in the European Union

The prevalence of either Ricardian or non-Ricardian fiscal regimes is important both for practical policy reasons and to assess fiscal sustainability, and this is of particular relevance for European Union countries. The purpose of this paper is to assess, with a panel data set, the empirical evidence concerning the existence of Ricardian fiscal regimes in EU-15 countries. The results give support to the Ricardian fiscal regime hypothesis throughout the sample period, and for sub-samples accounting for the dates of the Maastricht Treaty and for the setting-up of the Stability and Growth Pact. Additionally, electoral budget cycles also seem to play a role in fiscal behaviour.fiscal regimes; European Union; panel data models.

Sustainability of fiscal policy in the EU-15

Finanzpolitik, Europäische Wirtschafts- und Währungsunion, Fiscal policy, European Economic and Monetary Union

An avenue for expansionary fiscal contractions

Expansionary fiscal contractions were first illustrated by several fiscal episodes that occurred in Europe during the 1980s. This paper suggests a simple analytical textbook model that encompasses both Keynesian and non-Keynesian effects of fiscal policy. In such a context, the possibility of expansionary fiscal contractions is linked to the responsiveness of the risk premium of domestic interest rates to the budgetary position of the government and to the existence of credit-rationed consumers.fiscal policy; expansionary fiscal contractions; non-Keynesian effects

Euler Testing Ricardo and Barro in the EUs

According to Keynesian economics wisdom, government debt has an effect on the economy since consumers see government debt as net wealth. However, according to the debt neutrality hypothesis of Ricardo (1817), popularised by Barro (1974), such effects would be absent. This paper’s results, obtained from Euler equation estimations using a panel data approach, indicate that it would be wise to reject the debt neutrality hypothesis for the EU and that higher government indebtedness could actually deter private consumption.debt neutrality; private consumption; EU; panel data

Long-term Government Bond Yields and Economic Forecasts: Evidence for the EU

I use a panel of semi-annual vintages of growth and fiscal forecasts of the European Commission, covering the period 1998:II-2008:II, to assess its effects on 10-year government yields for 14 EU countries. Results show that yields increase with better growth forecasts, and with decreases in budget balance-to-GDP ratios, signalling that sovereigns may need to pay more to finance in the market higher budget deficits. Key words: interest rates, macro forecasts, EU.

Public finances in Portugal: a brief longrun view

This paper provides a succinct overview of long-run developments regarding public finances in Portugal with an emphasis on the spending side. Issues addressed are the excessive deficit experiences of Portugal, the past experience with fiscal consolidations, and labour cost competitiveness. It is fair to stay that public spending control has been a problem in Portugal, and fiscal consolidations in the 1980s and 1990s have been shorttermed and mostly not successful. Additionally, the compensation of general government employees diverged vis-à-vis the EU15 after EU entry.public finances; Portugal; fiscal consolidations; compensation of employees.

Bootstrap panel Granger-causality between government spending and revenue in the EU

Using bootstrap panel analysis, allowing for cross-country correlation, without the need of pre-testing for unit roots, we study the causality between government revenue and spending for the EU in the period 1960-2006. Spend-and-tax causality is found for Italy, France, Spain, Greece, and Portugal, while tax-and-spend evidence is present for Germany, Belgium, Austria, Finland and the UK, and for several EU New Member States.http://deepblue.lib.umich.edu/bitstream/2027.42/64366/1/wp944.pd