Fiscal Deficits, Public Debt and Government Solvency: Evidence from OECD Countries

Abstract

This paper discusses different empirical tests of public sector solvency and applies them to a sample of 18 OCED countries. Provided that the government solvency constraint need to be imposed, these tests develop from the idea of verifying whether the intertemporal budget constraint of the public sector would be satisfied a) had the fiscal and financial policy in the sample been pursued indefinitely and b) were the relevant macro and structural features of the economy stable over time. If solvency is not supported by the empirical evidence, a change either in the policy or in the relevant macro and structural variables (growth, inflation, interest rates, demographic factors) must occur at some point in the future. Among the G-7 countries, public sector solvency seems a serious issue in Italy, while does not appear to be a problem in the cases of Germany and Japan. The evidence for the U.S.A. is mixed. Problems of sustainability of the current path of fiscal policies are also present in Belgium, Ireland, the Netherlands and Greece.