Abstract
The present study examines the sustainability hypothesis by examining the co-integration between public revenues and public expenditures for selected 20 developed countries between 1999Q1 and 2011Q4. For this purpose, Hadri panel unit root test have been used to check the stationarity of variables. Bai and Perron multiple structural break point tests have been used to find possible breaks in the data. Pedroni co-integration tests and Westerlund co-integration tests have been used to find long run relationship between public revenues and expenditures after the adjustment of structural breaks in the analysis. Mean group/pooled mean group, fully modified ordinary least squares and dynamic ordinary least squares have been used to find the strength of relationship between said variables and to test the sustainability hypothesis. The result of study finds a unit slope on public expenditures and confirms the sustainability hypothesis for the selected sample. This also verifies the authenticity of present fiscal policy for our selected sample countries.
Similar content being viewed by others
References
Afonso, A.: Fiscal sustainability: the unpleasant European case. Finanz. Arch. 61, 19–44 (2005)
Afonso, A., Agnello, L., Furceri, D., Sousa, R.M.: Assessing long-term fiscal developments: a new approach. J. Int. Money Financ. 30(1), 130–146 (2011)
Afonso, A., Jalles, J.T.: Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries. Working Paper Series 1465, European Central Bank (2012)
Afonso, A., Rault, C.: What do we really know about fiscal sustainability in the EU? A panel data diagnostic. Rev. World Econ. 145(4), 731–755 (2010)
Arestis, P., Cipollini, A., Fattouh, B.: Threshold effects in the U.S. budget deficit. Econ. Inq. 42(2), 214–222 (2004)
Baglioni, A., Chrubini, U.: Inter-temporal budget constraint and public debt sustainability: the case of Italy. Appl. Econ. 25, 275–283 (1993)
Bai, J.: Estimating multiple breaks one at a time. Econom. Theory 13, 315–352 (1997)
Bai, J., Perron, P.: Estimating and testing linear models with multiple structural changes. Econometrica 66(1), 47–78 (1998)
Bai, J., Perron, P.: Computation and analysis of multiple structural change models. J. Appl. Econom. 18, 1–22 (2003)
Banerjee, A., Dolado, J.J., Mestre, R.: Error-correction mechanism tests for cointegration in a single-equation framework. J. Time Ser. Anal. 19, 267–283 (1998)
Bravo, A.B.S., Silvestre, A.L.: Intertemporal sustainability of fiscal policies: some tests for European countries. Eur. J. Polit. Econ. 18, 517–528 (2002)
Ehrhart, C., Llorca, M.: A global perspective of fiscal sustainability: evidence from a panel of 20 OECD countries. 11th International Conference on Macroeconomic Analysis and International Finance, in University of Crete, Rethymno, (Greece) (2007)
Hadri, K.: Testing for stationarity in heterogeneous panel data. Econom. J. 3, 148–161 (2000)
Hakkio, G., Rush, M.: Is the budget deficit too large? Econ. Inq. 33, 104–118 (1991)
Kao, C., Chiang, M.H.: On the estimation and inference of a co-integrated regression in panel data. Adv. Econom. 15, 179–222 (2000)
Keynes, J.: A tract on monetary reform. The collected writings of John Maynard Keynes. IV. Macmillan, London (1923). 1971
Kirchgaessner, G., Prohl, S.: Sustainability of Swiss fiscal policy. Swiss J. Econ. Stat. 144(1), 57–83 (2008)
MacDonald, R.: Some tests of the government’s inter-temporal budget constraint using U.S. data. Appl. Econ. 24, 1287–1292 (1992)
McCoskey, S., Kao, C.: A residual-based test of the null of co-integration in panel data. Econom. Rev. 17(1), 57–84 (1998)
Olekalns, N.: Sustainability and stability? Austrailian fiscal Policy in the \(20{\rm th}\) century. Aust. Econ. Pap. 39(2), 138–151 (2000)
Papadopoulos, A., Sidiropoulos, M.: The sustainability of fiscal policies in the European Union. Int. Adv. Econ. Res. 5, 289–307 (1999)
Payne, J.: International evidence on the sustainability of budget deficits. Appl. Econ. Lett. 12, 775–779 (1997)
Pedroni, P.: Fully Modified OLS for Heterogeneous Cointegrated Panels and the Case of Purchasing Power Parity. Indiana University working papers in economics no. 96–020 (1996)
Pedroni, P.: Critical values for co-integration tests in heterogeneous panels with multiple regressors. Oxford Bull. Econ. Stat. 61, 653–670 (1999)
Pedroni, P.: Fully modified OLS for heterogeneous cointegrated panels. Adv. Econom. 15, 93–130 (2000)
Pedroni, P.: Purchasing power parity tests in co-integrated panels. Rev. Econ. Stat. 83, 727–731 (2001)
Pedroni, P.: Panel co-integration; asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econom. Theory 20, 597–625 (2004)
Pesaran, M.H., Smith, R.: Estimating long-run relationships from dynamic heterogenous panels. J. Econom. 68, 79–113 (1995)
Pesaran, M. H., Shin, Y., Smith, R.: Pooled Estimation of Long-Run Relationships in Dynamic Heterogeneous Panels. Cambridge Working Papers in Economics 9721. University of Cambridge, Cambridge (1997)
Pesaran, M.H., Shin, Y., Smith, R.: Pooled mean group estimator of dynamic heterogeneous panels. J. Am. Stat. Assoc. 94, 621–634 (1999)
Quintos, C.: Sustainability of the deficit process with structural shifts. J. Bus. Econ. Stat. 13, 409–417 (1995)
Smith, G., Zin, S.: Persistant deficits and the market value of government debt. J. Appl. Econom. 6, 31–44 (1991)
Stock, J., Watson, M.: A simple estimator of co-integrating vectors in higher order integrated systems. Econometrica 61(4), 783–820 (1993)
Tanner, E., Liu, P.: Is the budget deficit “too large”?: some further evidence. Econ. Inq. 32(3), 511–518 (1994)
Westerlund, J.: Testing for error correction in panel data. Oxford Bull. Econ. Stat. 69, 709–748 (2007)
Westerlund, J., Prohl, S.: Panel co-integration tests of the sustainability hypothesis in rich OECD countries. Appl. Econ. 42, 1355–1364 (2010)
Wilcox, D.: The sustainability hypothesis of government deficits: implications of the present-value borrowing constraint. J. Money Credit Bank. 21, 291–306 (1989)
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Habib, A., Rehman, J.U., Zafar, T. et al. Does sustainability hypothesis hold in developed countries? A panel co-integration analysis. Qual Quant 50, 1–25 (2016). https://doi.org/10.1007/s11135-014-0134-4
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11135-014-0134-4