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ARE EU BUDGET DEFICITS STATIONARY?
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Abstract
In this paper, we test for the stationarity of European Union budget deficits over the period
1971 to 2006, using a panel of thirteen member countries. Our testing strategy addresses
two key concerns with regard to unit root panel data testing, namely (i) the presence of
cross-sectional dependence among the countries in the panel and (ii) the identification of
potential structural breaks that might have occurred at different points in time. To address
these concerns, we employ an AR-based bootstrap approach that allows us to test the null
hypothesis of joint stationarity with endogenously determined structural breaks. In contrast
to the existing literature, we find that the EU countries considered are characterised by
fiscal stationarity over the full sample period irrespective of us allowing for structural
breaks. This conclusion also holds when analysing sub-periods based on before and after
the Maastricht treaty.Heterogeneous dynamic panels, fiscal sustainability, mean reversion, panel stationarity test.