Fiscal Sustainability, Fiscal Reactions, Pitfalls and Determinants

28 Pages Posted: 22 Mar 2022

See all articles by António Afonso

António Afonso

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

José Carlos Coelho

ISEG Lisbon School of Economics and Management,Universidade de Lisboa

Date Written: 2022

Abstract

We examine the sustainability of public finances and its determinants for 19 Eurozone countries from 1995 to 2020. We conclude for the existence of panel cointegration between government revenues and expenditures; primary government balance and one-period lagged public debt-to-GDP ratio; and public debt-to-GDP ratio and one-period lagged primary government balance. The estimated fiscal reaction functions suggest the existence of a Ricardian fiscal regime. Finally, modelling via time-varying coefficients, we find that fiscal sustainability increases with growth, fiscal balances and fiscal rules indices, and decreases with trade openness, current account balances, government effectiveness index, after 2010, and with sovereign ratings assigned by the main rating agencies.

Keywords: fiscal sustainability, budget balance, public debt, panel data, time-varying coefficients, Eurozone, sovereign ratings

JEL Classification: C230, H610, H630, E620

Suggested Citation

Afonso, António and Coelho, José Carlos, Fiscal Sustainability, Fiscal Reactions, Pitfalls and Determinants (2022). CESifo Working Paper No. 9635, Available at SSRN: https://ssrn.com/abstract=4063444 or http://dx.doi.org/10.2139/ssrn.4063444

António Afonso (Contact Author)

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

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

HOME PAGE: http://https://www.iseg.ulisboa.pt/

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

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

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

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

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

José Carlos Coelho

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

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

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