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An empirical investigation of the sustainability of Fiscal Policy in Greece during the last two centuries

Dimitrios Paparas, Paparas Dimitrios and Christian Richter ()
Authors registered in the RePEc Author Service: Dimitrios Paparas

No 4129, EcoMod2012 from EcoMod

Abstract: Ee try to answer two very important questions; firstly if the Greek fiscal policy has been consistent with the government intertemporal budget constraint during the two tested periods, 1833-2009 and 1960-2009. We separate the last 50 years which according to most politicians was the problematic period in Greek finances and lead to unsustainable deficits. Secondly, we examine if it is possible to identify structural changes in the conduct of fiscal policy. We are using annual time series data from 1833.We are using several approaches such as Johansen approach, DOLS, Engle-Granger approach, Bohn test and finally Trehan-Walsh approach. Our empirical results are mixed and in contrast with our expectations, because the majority of the tests indicate sustainable fiscal policy in both tested periods. Greek budget deficits are now un-sustainable in the long-run, since public debt cannot grow for an indefinite period faster than the national output. However, we know that Budget policy is constrained by the need to finance the deficit, if it were possible for a government to borrow without limit and to finance the interest on debt by additional borrowing, any pattern of deficits would be sustainable. We suggest that probably Greek deficits were sustainable because it was easy for the country to finance their needs by borrowing money, by issuing bonds and selling them to private investors (domestic or overseas). An important part of the shift to unsustainable deficits was the crucial role of the rating agencies. Finally, our main results that Greek Fiscal policy is sustainable should not be presented as a sign to Greek government authorities and policy makers that they have to follow an expansionary fiscal policy.

Keywords: Greece; Public finance and tax issues; Public finance and tax issues (search for similar items in EconPapers)
Date: 2012-07-01
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