Euro area time‐varying fiscal sustainability

Antonio Afonso and Joao Jalles

International Journal of Finance & Economics, 2017, vol. 22, issue 3, 244-254

Abstract: We assess the time‐varying features of fiscal sustainability in the euro area via revisiting the empirical relationship between the primary budget surplus and the debt‐to‐GDP ratio. Focusing on a sample of 11 Euro‐area countries between 1999Q1 and 2013Q4 and by means of time series analyses, we find that (a) fiscal policy seems to have been sustainable in Belgium, France, Germany, and the Netherlands and a Ricardian (monetary dominant) regime might have been present; (b) debt exhibited a negative response following an innovation in the budget surplus in half of the sample; (c) the time‐varying coefficient model shows that the 2008–2009 global economic and financial crisis exerted a sizeable negative impact on fiscal sustainability; and (d) expenditure‐based fiscal rules are strong determinants of fiscal sustainability. All in all, we found some evidence against the Fiscal Theory of the Price Level.

Date: 2017
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Working Paper: Euro Area Time Varying Fiscal Sustainability (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:22:y:2017:i:3:p:244-254

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