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Using Panel Data to Test for Fiscal Sustainability within the European Union

Silke Prohl and Joakim Westerlund

FinanzArchiv: Public Finance Analysis, 2009, vol. 65, issue 2, 246-269

Abstract: Most empirical evidence suggests that the sustainability hypothesis, stating that government revenues and expenditures should cointegrate with a unit slope on expenditures, does not hold within the European Union, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the use of inappropriate time-series techniques, and that the use of panel data can generate more accurate tests. By using newly devised panel unit-root and cointegration techniques it is shown that the sustainability hypothesis cannot be rejected when applied to a panel composed of 15 European countries between 1970 and 2004.

Keywords: fiscal sustainability; panel unit root; panel cointegration (search for similar items in EconPapers)
JEL-codes: C22 C23 H60 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (8)

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DOI: 10.1628/001522109X470612

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