The sustainability of fiscal policy: evidence from a panel of six South-Mediterranean countries

Abstract

This article aims at assessing the sustainability of fiscal policies in a panel of six South-Mediterranean countries, namely Egypt, Israel, Lebanon, Morocco, Tunisia and Turkey. First, using panel data unit-root tests proposed by Im et al. (2003), Maddala and Wu (1999), and Choi (2001), econometric findings reveal that the variables of public expenditure, revenue and domestic debt in level are not stationary. However, employing panel cointegration tests designed by Pedroni (1999), it is found that government spending and revenue are cointegrated. This implies that fiscal policies in these countries are sustainable in the long run, i.e. they are consistent with inter-temporal budget balance in accordance with the present-value approach.

Acknowledgements

The assistance of Professor João Andrade is gratefully acknowledged.

Notes

¹In Levin and Lin (1993) test, the null hypothesis it that each series in the panel contains a unit root (H ₀: ρ _i  = ρ = 0, ∀i) against the alternative hypothesis that all individual series in the panel are stationary (H ₁: ρ _i  = ρ < 0, ∀i). This null hypothesis is shared by other panel unit-root tests, the alternative hypothesis, however, is too restrictive for practical purposes.

²See Pedroni (1999) for a detailed description of these statistics.