3-Step Analysis of Public Finances Sustainability: The Case of the European Union

47 Pages Posted: 9 Sep 2008

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

Christophe Rault

IZA Institute of Labor Economics; University of Orleans; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: September 2008

Abstract

We use a 3-step analysis to assess the sustainability of public finances in the EU27. Firstly, we perform the SURADF specific panel unit root test to investigate the mean-reverting behaviour of general government expenditures and revenues ratios. Secondly, we apply the bootstrap panel cointegration techniques that account for the time series and cross-sectional dependencies of the regression error. Thirdly, we check for a structural long-run equation between general government expenditures and revenues via SUR analysis. While results imply that public finances were not unsustainable for the EU panel, fiscal sustainability is an issue in most countries, with a below unit estimated coefficient of expenditure in the cointegration relation.

Keywords: fiscal sustainability, EU, panel cointegration

JEL Classification: C23, E62, H62

Suggested Citation

Afonso, António and Rault, Christophe and Rault, Christophe, 3-Step Analysis of Public Finances Sustainability: The Case of the European Union (September 2008). CESifo Working Paper Series No. 2393, Available at SSRN: https://ssrn.com/abstract=1264940 or http://dx.doi.org/10.2139/ssrn.1264940

António Afonso

University of Lisbon - ISEG (School of Economics and Management) ( email )

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HOME PAGE: http://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

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ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

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REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
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Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

Christophe Rault (Contact Author)

IZA Institute of Labor Economics

P.O. Box 7240
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Germany

University of Orleans ( email )

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LEO, Orleans, Orleans cedex 2 45067
France

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

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