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

António Afonso (1, 2) , Christophe Rault (3, 4)

1 European Central Bank
2 Department of Economics, UECE--Research Unit on Complexity and Economics
3 LEO - Laboratoire d'Économie d'Orleans [UMR7322]
4 BEM, Bordeaux Management School

We assess the sustainability of public finances in the EU-15 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 61(1):653-670, 1999; Econom Theory 20(3):597-625, 2004), generalized by Banerjee and Carrion-i-Silvestre (Cointegration in panel data with breaks and cross-section dependence, European Central Bank, Working Paper 591, 2006) and Westerlund and Edgerton (Econ Lett 97(3):185-190, 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 EU-15 panel set, and within sub-periods (1970-1991 and 1992-2006).

Mots clés: Intertemporal budget constraint; Fiscal sustainability; EU; Panel unit root; Panel cointegration; C23; E62; H62; H63

António Afonso, Christophe Rault. What do we really know about fiscal sustainability in the EU? A panel data diagnostic. Review of World Economics, 2009, 145 (4), pp.731-755. ⟨10.1007/s10290-009-0034-1⟩. ⟨hal-00612971⟩