A test of fiscal sustainability in the EU countries

Kyung woo Lee, Jong Hee Kim, Taeyoon Sung

Research output: Contribution to journalArticle

Abstract

In this paper, we evaluate fiscal sustainability of five regional groups in the EU using the dataset of 26 countries for the period 1950–2014. To this end, we estimate their policy rules in which primary surpluses respond to public debt and examine whether estimated policy rules satisfy the conditions for fiscal solvency. In the baseline solvency tests with time-invariant marginal responses of primary surpluses, we find that estimated policy rules satisfy the solvency condition that the marginal response be positive for the Benelux, northern, and eastern groups but fail to do so for the western and southern groups. When estimating their policy rules separately for eurozone and non-eurozone countries, we find that long-term fiscal sustainability of eurozone countries is more questionable in the sense that non-eurozone countries in all regional groups have significantly positive marginal responses, whereas eurozone countries in most regional groups do not. Finally, more general solvency tests that allow time-varying marginal responses reveal that only the Southern group fails to satisfy the generalized solvency conditions that marginal responses be always nonnegative and positive infinitely often. These findings seem to be consistent with the fact that countries in the Southern group experienced severe fiscal crises.

Original languageEnglish
Pages (from-to)1170-1196
Number of pages27
JournalInternational Tax and Public Finance
Volume25
Issue number5
DOIs
Publication statusPublished - 2018 Oct 1

Fingerprint

EU countries
Solvency
Fiscal sustainability
Policy rules
Euro zone
Fiscal
Surplus
Time-varying
Public debt

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Lee, Kyung woo ; Kim, Jong Hee ; Sung, Taeyoon. / A test of fiscal sustainability in the EU countries. In: International Tax and Public Finance. 2018 ; Vol. 25, No. 5. pp. 1170-1196.
@article{6015ff93cc61489ea84071035aaa54a6,
title = "A test of fiscal sustainability in the EU countries",
abstract = "In this paper, we evaluate fiscal sustainability of five regional groups in the EU using the dataset of 26 countries for the period 1950–2014. To this end, we estimate their policy rules in which primary surpluses respond to public debt and examine whether estimated policy rules satisfy the conditions for fiscal solvency. In the baseline solvency tests with time-invariant marginal responses of primary surpluses, we find that estimated policy rules satisfy the solvency condition that the marginal response be positive for the Benelux, northern, and eastern groups but fail to do so for the western and southern groups. When estimating their policy rules separately for eurozone and non-eurozone countries, we find that long-term fiscal sustainability of eurozone countries is more questionable in the sense that non-eurozone countries in all regional groups have significantly positive marginal responses, whereas eurozone countries in most regional groups do not. Finally, more general solvency tests that allow time-varying marginal responses reveal that only the Southern group fails to satisfy the generalized solvency conditions that marginal responses be always nonnegative and positive infinitely often. These findings seem to be consistent with the fact that countries in the Southern group experienced severe fiscal crises.",
author = "Lee, {Kyung woo} and Kim, {Jong Hee} and Taeyoon Sung",
year = "2018",
month = "10",
day = "1",
doi = "10.1007/s10797-018-9488-1",
language = "English",
volume = "25",
pages = "1170--1196",
journal = "International Tax and Public Finance",
issn = "0927-5940",
publisher = "Springer New York",
number = "5",

}

A test of fiscal sustainability in the EU countries. / Lee, Kyung woo; Kim, Jong Hee; Sung, Taeyoon.

In: International Tax and Public Finance, Vol. 25, No. 5, 01.10.2018, p. 1170-1196.

Research output: Contribution to journalArticle

TY - JOUR

T1 - A test of fiscal sustainability in the EU countries

AU - Lee, Kyung woo

AU - Kim, Jong Hee

AU - Sung, Taeyoon

PY - 2018/10/1

Y1 - 2018/10/1

N2 - In this paper, we evaluate fiscal sustainability of five regional groups in the EU using the dataset of 26 countries for the period 1950–2014. To this end, we estimate their policy rules in which primary surpluses respond to public debt and examine whether estimated policy rules satisfy the conditions for fiscal solvency. In the baseline solvency tests with time-invariant marginal responses of primary surpluses, we find that estimated policy rules satisfy the solvency condition that the marginal response be positive for the Benelux, northern, and eastern groups but fail to do so for the western and southern groups. When estimating their policy rules separately for eurozone and non-eurozone countries, we find that long-term fiscal sustainability of eurozone countries is more questionable in the sense that non-eurozone countries in all regional groups have significantly positive marginal responses, whereas eurozone countries in most regional groups do not. Finally, more general solvency tests that allow time-varying marginal responses reveal that only the Southern group fails to satisfy the generalized solvency conditions that marginal responses be always nonnegative and positive infinitely often. These findings seem to be consistent with the fact that countries in the Southern group experienced severe fiscal crises.

AB - In this paper, we evaluate fiscal sustainability of five regional groups in the EU using the dataset of 26 countries for the period 1950–2014. To this end, we estimate their policy rules in which primary surpluses respond to public debt and examine whether estimated policy rules satisfy the conditions for fiscal solvency. In the baseline solvency tests with time-invariant marginal responses of primary surpluses, we find that estimated policy rules satisfy the solvency condition that the marginal response be positive for the Benelux, northern, and eastern groups but fail to do so for the western and southern groups. When estimating their policy rules separately for eurozone and non-eurozone countries, we find that long-term fiscal sustainability of eurozone countries is more questionable in the sense that non-eurozone countries in all regional groups have significantly positive marginal responses, whereas eurozone countries in most regional groups do not. Finally, more general solvency tests that allow time-varying marginal responses reveal that only the Southern group fails to satisfy the generalized solvency conditions that marginal responses be always nonnegative and positive infinitely often. These findings seem to be consistent with the fact that countries in the Southern group experienced severe fiscal crises.

UR - http://www.scopus.com/inward/record.url?scp=85044296392&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85044296392&partnerID=8YFLogxK

U2 - 10.1007/s10797-018-9488-1

DO - 10.1007/s10797-018-9488-1

M3 - Article

VL - 25

SP - 1170

EP - 1196

JO - International Tax and Public Finance

JF - International Tax and Public Finance

SN - 0927-5940

IS - 5

ER -