Fiscal Sustainability Hypothesis Test in Central and Eastern Europe: A Panel Data Perspective

• Authors: Benjamin Owusu

Abstracts

EN

This paper assesses the fiscal sustainability hypothesis for 10 Central and Eastern European countries (CEEC) between 1997 and 2019. The study adopts very recent panel econometric techniques which accounts for issues of structural breaks and cross-sectional dependence in the data generating process to examine the cointegration between government revenue and expenditures. Preliminary results show that revenues and expenditures do not have a long-run relationship and hence a rejection of the sustainability hypothesis. As a next step, we discriminate between structural and cyclical components of revenues and expenditures in order to place emphasis on the structural component. We argue that the structural component of fiscal variables represents the actual long term behaviour of the policymaker. Further results indicate that structural revenues and expenditures have a long-run relationship however with a slope coefficient less than unity which implies sustainability in the weaker sense. At that point, expenditures exceed revenues and if this continues for a long time the government may find it difficult to market its debts in the long run. This result suggests that the fiscal authorities in CEEC must therefore do more by taking long term actions to counteract the rising fiscal deficit problems.

Keywords

EN

Fiscal Sustainability; Cointegration; Government Revenue; Government Expenditure

• Publisher: Uniwersytet Warszawski. Wydział Nauk Ekonomicznych
• Journal: Central European Economic Journal
• Year: 2021
• Volume: 8
• Issue: 55
• Pages: 285-312

Dates

published

2021

Contributors

author

Benjamin Owusu

• Department of Business Administration and Economics Germany

References

• Abel, A., Mankiw, N., Summers, L., & Zeckhauser, R. (1989). Assessing Dynamic Efficiency: Theory and Evidence. The Review of Economic Studies, 56(1), 1–19.
• Afonso, A. (2005). Fiscal sustainability: the unpleasant European case. FinanzArchive, 61, 19–44.
• Afonso, A., & Rault, C. (2010). What do we really know about fiscal sustainability in the EU? A panel data diagnostic. Review of World Economics, 145, 731–755.
• Ahmed, S., & Rogers, J. (1995). Government budget deficits and trade deficits. Are present value constraints satisfied in long-term data? Applied Journal of Monetary Economics 36, 351–374.
• Ahn, S. K. (1993). Some tests for unit roots in autoregressive-integrated-moving average models with deterministic trends. Biometrica, 80, 855–868.
• Amsler, C., & Lee, J. (1995). An LM test for a unit root in the presence of a structural break. Econometric Theory, 11, 359–368.
• Andrews, D. W. K. (1993). Test for parameter instability and structural change with unknown change point. Econometrica, 61, 821–856.
• Andrews, D. W. K., & Ploberger, W. (1994). Optimal test when a nuisance parameter is present only under the alternative. Econometrica, 62, 1383–1414.
• Andrews, D. W. K., Lee, I., & Ploberger, W. (1996). Optimal changepoint tests for normal linear regression. Econometrica, 70, 9–36.
• Baglioni, A. & Cherubini, U. (1993), “Intertemporal budget constraint and public debt sustainability: the case of Italy”, Applied Economics, 25:2, 275–283,
• Bai, J., & Ng, S. (2004). A panic attack on unit roots and cointegration. Econometrica, 72, 1127–1177.
• Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66, 47–78.
• Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Econometrica, 66, 1–22.
• Baldi, G., & Staehr, K. (2016). “The European debt crisis and fiscal reactions in Europe 2000–2014”, International Economics and Economic Policy, 13(2), 297–317,
• Baltagi, H. B. (2005). Econometric Analysis of Panel Data (3rd edn). Chichester, England: John Wiley and Sons.
• Baltagi, H. B. (2008). Forecasting with panel data. Journal of Forecasting, 27(2), 153–173.
• Baltagi, H. B. & Jung, B.C. & Song, S. H. (2010). “Testing for heteroskedasticity and serial correlation in a random effects panel data model,” Journal of Econometrics, Elsevier, vol. 154(2), 122–124.
• Banerjee, A., Marcellino, M., & Osbat, C. (2004). Some cautions on the use of panel methods for integrated series of macro-economic data. Econometrics Journal, 7(2), 322–334.
• Becker, R., Enders, W., & Lee, J. (2006). A stationarity test in the presence of an unknown number of smooth breaks. Journal of Time Series Analysis, 27(3), 381–409.
• Beqiraj, E., Fedeli, S., & Forte, F. (2018). Public debt sustainability: An empirical study on OECD countries. Journal of Macroeconomics, 58, 238–248.
• Blackburne, E. F., & Frank, M.W. (2007). Estimation of nonstationarity heterogeneous panels. The Stata Journal, 7, 197–208.
• Blanchard, O. (2006). Macroeconomics (4th edn). New Jersey: Pearson Prentice Hall.
• Boekemeier, B., & Stoian, A. (2018). Debt sustainability issues in central and east European countries. Eastern European Economics, 56(5), 438–470.
• Brady, G.L & Magazzino, c. (2018). “Sustainability and comovement of government debt in EMU Countries: A panel data analysis,” Southern Economic Journal, John Wiley & Sons, 85(1), 189–202.
• Breusch, T. S., & Pagan, A. (1980). The LM test and its applications to model specification in econometrics. Review of Economic Studies, 47, 239–254.
• Campbell, J., & Perron, P. (1991). Pitfalls and opportunities: What macroeconomists should know about unit roots. In NBER Macroeconomics Annual, Vol. 72, pp. 141–201,. (O.J. Blanchard, S. Fisher, eds). Cambridge, MA: MIT Press.
• Carrion-i-Silvestre, J. L., Barrio-Castro, T. D., & Lopez-Bazo, E. (2005). Breaking the panels: An application to the GDP per capita. Econometrics Journal, 8(2), 159–175.
• Chen, B., McCoskey, S., & Kao, C. (1999). Estimation and inference of a cointegrated regression inpanel data: A Monte Carlo study. American Journal of Mathematical and Management Sciences, 19, 75–114.
• Claeys, P. (2007). Sustainability of EU fiscal policies: A panel test. Journal of Economic Integration, 22(1), 112–127.
• Forest, J. J., & Turner, P. (2013). Alternative estimators of cointegrating parameters in models with nonstationary data: An application to US export demand. Applied Economics, 45(5), 629–636.
• Checherita-Westphal, C. & Žďárek, V. (2017). “Fiscal reaction function and fiscal fatigue: evidence for the euro area,” Working Paper Series 2036, European Central Bank.
• Galí, J., Perotti, R., Lane, R.P., & Richter, F.W. (2003). Fiscal policy and monetary integration in Europe. Economic Policy, 18(37), 535–572.
• Gleich, H. (2003). Budget institutions and fiscal performance in Central and Eastern European countries. European Central Bank Working Paper Series, No. 215.
• Greiner, A., & Fincke, B. (2015). Public Debt, Sustainability and Economic Growth. Heidelberg, Germany: Springer Verlag.
• Greiner, A., & Semmler, W. (1999). An inquiry into the sustainability of German fiscal policy: Some time-series tests. Public Finance Review, 27, 220–236.
• Hadri, K., & Kurozumi, E. (2011). A locally optimal test for no unit root in crosssectionally dependent panel data. Hitotsubashi Journal of Economics, 52(2), 165–184.
• Hadri, K., & Kurozumi, E. (2012). A simple panel stationarity test in the presence of serial correlation and a common factor. Economics Letters, 115(1), 31–34.
• Hallett, A. H., & Lewis, J. (2007). Debt, deficits, and the accession of the new member States to the Euro. European Journal of Political Economy, 23(2), 316337.
• Hamilton, J. D. (2018). Why you should never use the Hodrick-Prescott filter. Review of Economics and Statistics, 100(5), 831–843.
• Hamilton, J., & Flavin, M. (1986). On the limitations of government borrowing: A framework for empirical testing. American Economic Review, 76, 808–819.
• Hakkio, G,. & Rush, M. (1991). “Is the Budget Deficit Too Large?”, Economic Inquiry, 29, 429–445.
• Hsiao, C. (2003). Analysis of Panel Data (2nd edn). UK: Cambridge University Press.
• Hsiao, C. (2014). Analysis of Panel Data (3rd edn). Cambridge University Press, Cambridge.
• Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53–74.
• Kao, C. (1999). Spurious regression and residual-based test for cointegration in panel data. Journal of Econometrics, 90, 1–44.
• Kao, C., & Chiang, M. H. (2000). On the estimation and inference of a cointegrated regression in panel data. Advances in Econometrics, 15, 179–222.
• Krajewski, P., Mackiewicz, M., & Szymańska, A. (1993–2016). Fiscal sustainability in central and eastern European countries – A post-crisis assessment. Prague Economic Papers, 25(2), 175–188.
• Kremers, J. (1988). The long-run limits of U.S. Federal Debt. Economics Letters, 28, 259–262.
• Lee, Kw., Kim, JH. & Sung, T. (2018). “A test of fiscal sustainability in the EU countries”, Int Tax Public Finance 25,1170–1196
• Levin, A., Lin, C., & Chu, C. (2002). Unit root tests in panel data: Asymptotic and Finite-sample properties. Journal of Econometrics, 108, 1–24.
• Liu, P., & Tanner, E. (1995). “Intertemporal Solvency and Breaks in the U.S. Decit Process: A Maximum-likelihood Cointegration Approach.” Economics Letters, 2, 231–235.
• Llorca, M. & Redzepagic, S. (2008). “Debt sustainability in the EU new member states: empirical evidence from a panel of eight Central and East European countries”, Post-Communist Economies, 20(2): 159–172.
• Maddala, G. S., & Wu, S. (1999). A comparative study of unit root test with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61, 631–652.
• Martin, V., Hurn, S., & Harris, D. (2013). Econometric modelling with time series: Specification, estimation and testing. In Themes in Modern Econometrics. New York: Cambridge University Press, 567–570.
• Nazlioglu, S., & Karul, C. (2017). A panel stationarity test with gradual structural shifts: re-investigate the international commodity price shocks. Economic Modelling, 61, 181–192.
• OECD. (2000). Government at a Glance – Yearly updates, Public finance and economics. Retrieved from https://stats.oecd.org/Index.aspx?queryid=82342 [Accessed on 19 September 2020].
• Pedroni, P. (2000). Fully modified OLS for heterogeneous cointegrated panels. Advances in Econometrics, 15, 93–130.
• Pedroni, P. (2001). Purchasing power parity tests in cointegrated panels. Review of Economics and Statistics, 83, 727–731.
• Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series test with an application to the PPP Hypothesis. Econometric Theory, 61, 597–625.
• Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. 4, 967–1012.
• Pesaran, M.H. (2004). “General diagnostics test for cross-sectional dependence in panels”, Working Papers in Economics 0435, Trinity College, Dublin.
• Pesaran, M. H., & Smith, R. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics, 68(1), 79–113.
• Phillips, P. C. B., & Hansen, B. E. (1990). Statistical inference in instrumental variables regression with I(1) processes. Review of Economic Studies, 57, 99–125.
• Prohl, S., & Schneider, F. (2006). Sustainability of public debt and budget deficit: Panel cointegration analysis for the European Union Member countries. Working Paper, No. 0610, Johannes Kepler University of Linz, Department of Economics, Linz.
• Quintos, C. (1995). Sustainability of the deficit process with structural shifts. Applied Journal of Business Economic Statistics, 13, 409–417.
• Royston, P (1982). An extension of Shapiro and Wilk's W test for normality to large samples. Applied Statistics, 31, 115–124.
• Saikkonen, P. (1991). Asymptotically efficient estimation of cointegrating regressions. Econometric Theory, 7, 1–21.
• Scheuer, F., & Slemrod, J. (2019). Taxation and the Superrich. NBER Working Paper Series, No. 26207.
• Schmidt, P., & Phillips, P. C. B. (1992). LM tests for a unit root in the presence of deterministic trends. Oxford Bulletin of Economics and Statistics, 54, 257–287.
• Stock, J., & Watson, M. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61, 783–820.
• Trehan, B., & Walsh, C. (1988). Common trends, the government's budget constraint, and revenue smoothing. Journal of Economic Dynamics and Control, 12, 425–444.
• Westerlund, J., & Prohl, S. (2010). Panel cointegration tests of the sustainability hypothesis in rich OECD countries. Applied Economics, 42(1), 1355–1364.
• Westerlund, W., & Edgerton, D. L (2008). A simple test for cointegration in dependent panels with structural breaks. Oxford Bulletin of Economic and Statistics, 70(5), 665–704.
• Wickens, M. (2008). Macroeconomic Theory, A Dynamic General Equilibrium Approach. Princeton University Press, Princeton, NJ.
• Wilcox, D., & Walsh, C. (1989). The sustainability of government deficits: implications of the present-value borrowing constraint. Journal of Money, Credit, and Banking, 21, 291–306.
• Wooldridge, J. M. (2009). Introductory Econometrics: A Modern Approach (4th edn). South-Western, Mason (OH).
• Zeileis, A., Kleiber, C., Krämer, W., & Hornik, K (2003). Testing and dating structural dates in practice. Computational Statistics and Data Analysis, 44, 109123.

Identifiers

DOI

10.2478/ceej-2021-0021

Biblioteka Nauki

1964897