Abstract
We assessed the sustainability of fiscal policy in the 28 European Union countries over the 1980-2015 years. Panel unit root tests in the presence of cross-sectional dependence showed that government revenues, expenditures, the primary balance, and debt were non-stationary series. However, cointegration tests reveled that a long-run relationship exists between government revenues and expenditures as well as between government primary deficit and debt. The results of causality tests were in line with the neutrality hypothesis: government revenues do not cause the expenditures, and vice versa. Furthermore, mixture models analyses indicated the presence of three homogeneous clusters, one of which included Portugal, Ireland, Italy, Greece, and Spain (PIIGS), whose coefficient of 0.68 indicates the absence of sustainability, since government expenditures grow faster than revenues.
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Acknowledgements
Comments from the participants at the Present and future of the EU and EMU: Debts, deficits, and related institutional designs. Conference in Honour of Francesco Forte (Rome, December 2016), as well as the participants at the 83rd International Atlantic Economic Conference (Berlin, March 22-25, 2017) are gratefully acknowledged. Moreover, we thank the anonymous referees and the editor for valuable comments and suggestions. The usual disclaimer applies.
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Brady, G.L., Magazzino, C. Fiscal Sustainability in the EU. Atl Econ J 46, 297–311 (2018). https://doi.org/10.1007/s11293-018-9588-4
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DOI: https://doi.org/10.1007/s11293-018-9588-4