Budgetary Constrained Governments: Drivers of Time Varying Fiscal Sustainability in OECD Countries

28 Pages Posted: 10 Jun 2024

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: 2024

Abstract

We assess the drivers of fiscal sustainability in 20 OECD economies between 1950 and 2019. We find stable long-term relationships between government revenues and expenditures as well as between the primary budget balance and past public debt ratio for the full panel. Performing an expanding window analysis, we conclude that the differential between the long-term real interest rate and the real GDP growth rate (r-g) plays a crucial role in fiscal sustainability, as well as the existence of fiscal rules in terms of the budget balance, and also the output gap. The effects of inflation, external accounts balance and fiscal rules on sustainability coefficients à la Hakkio and Rush (1991) and Bohn (1998) are heterogenous. Furthermore, before the global financial crisis of 2008, the effects of the (r-g) differential were particularly strong, and depended on its sign as well as on past debt-to-GDP ratios.

Keywords: fiscal sustainability, primary budget balance, public debt, panel data, expanding window, fiscal rules

JEL Classification: C230, H610, H630, E620

Suggested Citation

Afonso, António and Coelho, José Carlos, Budgetary Constrained Governments: Drivers of Time Varying Fiscal Sustainability in OECD Countries (2024). CESifo Working Paper No. 11137, Available at SSRN: https://ssrn.com/abstract=4856956 or http://dx.doi.org/10.2139/ssrn.4856956

António Afonso

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

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LISBOA, 1200-781
Portugal

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

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

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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 (Contact Author)

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

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

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