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Government spending and revenues in the Greek economy: evidence from nonlinear cointegration

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Abstract

This paper attempts to re-evaluate the long-run macroeconomic relationship between government revenues and expenditures of the Greek economy over the period 1999–2010. The empirical analysis applies the newly developed asymmetric ARDL cointegration methodology of Shin et al. (2011) which permits more flexibility in the dynamic adjustment process towards equilibrium, than in the classical case of a linear model. Our findings point towards the fiscal synchronization hypothesis, supporting evidence of asymmetric interactions between the two fiscal components in both the long- and the short-run time horizon. More particularly, in the long-run, the negative changes of expenditures dominate the response of revenues, while the opposite applies in the response of expenditures.

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Notes

  1. Investigating the relationship between government revenues and expenditures also provides the framework to address the issue of budget sustainability. Most relevant studies either focus on testing the discounted public deficit or the debt for stationarity (Hamilton and Flavin 1986; Holmes et al. 2010; and others), or on the detection of a long-run relationship between government revenues and spending, adopting the cointegration framework (Trehan and Walsh 1988, 1991; Haug 1991; and others).

  2. For an international survey of the empirical literature regarding the revenue-expenditure nexus up to 2003, see Payne (2003).

  3. For an extensive derivation of the model see Shin et al. (2011).

  4. Following Shin et al. (2011), we adopted a conservative approach to the choice of critical values and employed k = 1.

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Authors and Affiliations

  1. Department of Business Administration, Technological Educational Institute of Serres, 62124, Serres, Greece

    Athanasios Athanasenas

  2. Department of Economics, Aristotle University of Thessaloniki, 54124, Thessaloníki, Greece

    Constantinos Katrakilidis & Emmanouil Trachanas

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  1. Athanasios Athanasenas
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  2. Constantinos Katrakilidis
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  3. Emmanouil Trachanas
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Correspondence to Emmanouil Trachanas.

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Athanasenas, A., Katrakilidis, C. & Trachanas, E. Government spending and revenues in the Greek economy: evidence from nonlinear cointegration. Empirica 41, 365–376 (2014). https://doi.org/10.1007/s10663-013-9221-3

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