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Membership in the Euro area and fiscal sustainability. Analysis through panel fiscal reaction functions

Piotr Ciżkowicz (), Andrzej Rzońca and Rafał Trzeciakowski ()

No 203, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for the 12 Euro area member states over the 1970-2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996-2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to the lack of sufficient adjustment in the government non-investment expenditure and direct taxes. In contrast, in the core member states, which did not benefit from the yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to sovereign debt increased between 1996 and 2007. This was achieved mainly through pronounced adjustments in the government non-investment expenditure. Our findings are in accordance with the predictions of the theoretical model by Aguiar et al. (2014) and are robust to various changes in the modelling approach.

Keywords: fiscal reaction function; sovereign bond yields’ convergence; fiscal adjustment composition (search for similar items in EconPapers)
JEL-codes: C23 E62 F34 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
Date: 2015
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Related works:
Journal Article: Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions (2015) Downloads
Working Paper: Membership in the Euro area and fiscal sustainability - Analysis through panel fiscal reaction functions (2015) Downloads
Working Paper: Membership in the Euro area and fiscal sustainability. Analysis through panel fiscal reaction functions (2015) Downloads
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