Public Finances Solvency in the Euro Area: True or False?

REM Working Paper 0243-2022

30 Pages Posted: 22 Sep 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

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Date Written: September 6, 2022

Abstract

We assess public finances solvency for Euro Area countries using quarterly data between 1999Q1 and 2020Q4. Through a country-by-country analysis, the answer to the title question is true. For most countries, (i) the primary budget balance reacts positively to the lagged public debt ratio and past primary government balances contribute to the reduction of the public debt ratio, indicating a Ricardian fiscal regime. Furthermore, in a panel framework: (ii) the response of revenues to government expenditures is higher from 2010 onwards, and, for higher average public debt ratios, the response is lower, while (iii) the response of the primary government balance to the lagged public debt ratio is lower from 2010 onwards and is higher for higher average public debt ratios; (iv) past primary budget balances allow the public debt ratio to be reduced, especially before 2010 and in countries whose average public debt ratio is between 60 and 90% of GDP. Using a rolling window method, we find that (v) fiscal sustainability coefficients are higher the higher the lagged public debt ratios, fiscal rule indexes and sovereign ratings. Conversely, after 2010 and in periods of legislative elections, those coefficients are lower.

Keywords: fiscal sustainability, primary budget balance, public debt, panel data, rolling windows, Euro Area, quarterly fiscal data

JEL Classification: C23, H61, H63, E62

Suggested Citation

Afonso, António and Coelho, José Carlos, Public Finances Solvency in the Euro Area: True or False? (September 6, 2022). REM Working Paper 0243-2022, Available at SSRN: https://ssrn.com/abstract=4211528

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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