Public finances in the EU-27: Are they sustainable?

Abstract

In this paper we aim to analyse the degree of mean reversion of public expenditure, revenue and the difference between them, over GDP for 27 European Union (EU) countries. To gain flexibility in the analysis of the order of integration of the variables we apply fractional integration techniques. In general, we find evidence of mean reversion in all countries.

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Notes

  1. 1.

    For a comprehensive literature review, see e.g. Afonso (2005) and Paparas et al. (2015).

  2. 2.

    Countries with data from 1999Q1 to 2014Q1 are: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Poland, Portugal, Slovakia, Slovenia, The Netherlands. For the remaining countries, the initial period for the analysis is: the United Kingdom (1987Q1); Belgium and France (1991Q1); Sweden (1993Q1); Germany, Spain and Cyprus (1995Q1); Romania and Finland (1998Q1) and Malta (2000Q1). Performing the analysis with the same sample size in all countries produced almost identical results.

  3. 3.

    Note that in the context of fractional integration with d > 0, the time trend coefficient becomes irrelevant since it tends to a constant in the long run.

  4. 4.

    Note that for the selected models, i.e., those marked in bold in the table, the intervals exclude the value of d = 1 in all cases.

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Acknowledgements

Juan Carlos Cuestas and Luis Gil-Alana gratefully acknowledge the financial support from the research Grant ECO2017-83255-C3-3-P and ECO2017-85503-R ‘Programa Estatal de Fomento de la Investigación, Científica y Técnica de Excelencia, Subprograma Estatal de Generación de Conocimiento, Ministerio de Economía, Industria y Competitividad (MINEIC), Gobierno de España, 2018–2020’. Comments from an anonymous referee and the editor are gratefully acknowledged. The usual disclaimer applies.

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Correspondence to Luis A. Gil-Alana.

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Comments from the editor and three anonymous reviewers are gratefully acknowledged.

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Cuestas, J.C., Gil-Alana, L.A. & Sauci, L. Public finances in the EU-27: Are they sustainable?. Empirica 47, 181–204 (2020). https://doi.org/10.1007/s10663-018-9411-0

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Keywords

  • Public revenues
  • Public expenditures
  • Fractional integration

JEL Classification

  • C32
  • E62
  • H60