Debt Sustainability Issues in Central and East European Countries

Abstract

The goal of this study is to investigate debt sustainability in ten Central and East European countries over the period 1998–2015. We calculate the stabilized debt ratios, turning points, and debt limits using estimates of a fiscal reaction function in its cubic form. We use a balanced panel with fixed effects. We find that in 2017, the public debt exceeded the stabilized debt ratio in all the countries examined. However, the public debt is stable and is below the turning point. Moreover, governments are still far from the debt thresholds of “fiscal fatigue.”

Keywords:

• CEECs economies
• fiscal reaction function
• fiscal sustainability
• public debt

JEL Classification:

• H63
• E62

Acknowledgments

We acknowledge helpful comments from four anonymous referees and from the participants in the Laboratorire d’Economie d’Orléans (LEO, University of Orleans) research seminar and in the nineteenth annual INFER Conference (University of Bordeaux).

Notes

1. These theoretical issues are pointed out in a similar way by Fincke (2012).

2. See Blanchard (2000, ch. 27.1) for the subsequent equations. The notation refers to discrete variables here. Similar approaches are also found in Neck and Sturm (2008, ch. 1.5) and Burger (2003).

3. See, Neck and Sturm (2008), ch. 1.5.

4. See Blanchard (2000, ch. 27.1, Appendix 2), for calculations of the approximations.

5. Note that for the stabilized debt ratios that emerge from the linear, quadratic, and cubic fiscal response, we consider only positive values of the public debt ratio.

6. This differs from our case, since our models do not include the lagged primary surplus as explanatory. However, we mention it just to be consistent with the literature in this field and to check the robustness of our results by making a comparison with previous studies.

7. All our estimations using the stepwise approach are available on request from the authors.

8. The stepwise approach shows that the standard response coefficient to squared lagged debt ratio, c₂, becomes statistically significant when the control variable inflation is added. When the dummy variable to control for the time effects, eurozone, is added, it becomes irrelevant.

9. We also note that we neglect the control variables and the error term.

10. We calculated the turning points for Bulgaria, Estonia, Lithuania, and Poland, as well, because the coefficients implied by the formula are statistically significant.

11. We refer to countries for which we calculated the stabilized debt ratios.

12. The data on the implicit interest rate on public debt and on the GDP growth rate are extracted from Ameco as of August 2017.