The sustainability of fiscal policy: A group-mean panel estimator approach

Abstract

There has been a rising interest recently on studying sustainability of fiscal policy using panel data. Generally, these kinds of studies will in their last come up with a conclusion that a panel of countries have or haven’t a sustainable fiscal policy. To come up with such kind of conclusion, most of those studies implicitly assume that there is a common cointegrated relationship in government revenue and expenditure between countries in their panel data. However there is not much argument could support that necessarily those countries shares a same long run relationship. This paper employs recently developed techniques, group-mean panel estimator (include group-mean panel FMOLS and DOLS), for investigating the sustainability of fiscal policy in a panel of countries , but without assuming that there must be a common cointegrated relationship in government revenue and expenditure between countries in their panel data. To our knowledge, this is the first paper adopt a group-mean panel estimator to investigate whether countries have a sustainable fiscal policy