Fiscal sustainability: a panel assessment for advanced economies

Abstract

We assess the sustainability of public finances in OECD countries using panel unit root and cointegration analyses. Results show no cointegration (no sustainability) between revenues and expenditures, improvement of the primary balances after worsening debt ratios and causality from government debt to primary balances.

Keywords:

• debt
• primary balance
• stationarity
• panel analysis
• FMOLS

JEL Classification:

• C33
• E62
• H62
• H63

Acknowledgements

We are grateful for comments at ECB, and ISEG seminars, and at the INFER Annual Conference. The opinions expressed herein are those of the authors and not necessarily those of their employers.

Notes

¹ In terms of data, expenditure (1.0.319.0.UUTGF), revenue (1.0.319.0.URTGF), debt (1.0.319.0.UDGGF) and primary balance (1.0.319.0.UBLGI) come from AMECO database for EU countries plus OECD for the remainder.

² In the presence of unit roots, the effect of superconsistency may not dominate the endogeneity effect of regressors if OLS is employed. FMOLS takes care of the endogeneity problem and provides unbiased estimates of the coefficients, which can be interpreted as long-run elasticities.

Additional information

Funding

UECE is supported by the Portuguese Foundation for Science and Technology through PEst-OE/EGE/UI0436/2011.