International Tax and Public Finance

, Volume 25, Issue 5, pp 1170–1196 | Cite as

A test of fiscal sustainability in the EU countries

  • Kyung-woo Lee
  • Jong-Hee Kim
  • Taeyoon Sung


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.


EU Debt Sustainability Eurozone 

JEL Classification

H6 E62 F45 

Supplementary material

10797_2018_9488_MOESM1_ESM.docx (50 kb)
Supplementary material 1 (DOCX 50 kb)


  1. Ahmed, S., & Rogers, J. H. (1995). Government budget deficits and trade deficits: Are present value constraints satisfied in long-run data? Journal of Monetary Economics, 36, 351–374.CrossRefGoogle Scholar
  2. Barro, R. J. (1986). U.S. deficits since world war I. Scandinavian Journal of Economics, 88(1), 195–222.CrossRefGoogle Scholar
  3. Bohn, H. (1995). The sustainability of budget deficits in a stochastic economy. Journal of Money, Credit and Banking, 27(1), 257–271.CrossRefGoogle Scholar
  4. Bohn, H. (1998). The behavior of U.S. public debt and deficits. Quarterly Journal of Economics, 113(3), 949–963.CrossRefGoogle Scholar
  5. Bohn, H. (2002). Government asset and liability management in an era of vanishing public debt. Journal of Money, Credit and Banking, 34(3), 887–933.CrossRefGoogle Scholar
  6. Bohn, H. (2005). The sustainability of fiscal policy in the United States. CESifo working paper, no. 1446.Google Scholar
  7. Canzoneri, M. B., Cumby, R. E., & Diba, B. T. (2001). Is the price level determined by the needs of fiscal solvency? American Economic Review, 91(5), 1221–1238.CrossRefGoogle Scholar
  8. Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20, 249–272.CrossRefGoogle Scholar
  9. Hakkio, C. S., & Rush, M. (1991). Is the budget deficit too large? Economic Inquiry, 29, 429–445.CrossRefGoogle Scholar
  10. Hamilton, J. D., & Flavin, M. (1986). On the limitations of government borrowing: A framework for empirical testing. American Economic Review, 76, 808–819.Google Scholar
  11. Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53–74.CrossRefGoogle Scholar
  12. Mauro, P., Romeu, R., Binder, A., & Zaman, A. (2015). A modern history of fiscal prudence and profligacy. Journal of Monetary Economics, 76, 55–70.CrossRefGoogle Scholar
  13. Mendoza, E. G., & Ostry, J. D. (2008). International evidence on fiscal solvency: Is fiscal policy “responsible”? Journal of Monetary Economics, 55, 1081–1093.CrossRefGoogle Scholar
  14. Trehan, B., & Walsh, C. E. (1988). Common trends, the government budget constraint and revenue smoothing. Journal of Economic Dynamics and Control, 12, 425–444.CrossRefGoogle Scholar
  15. Trehan, B., & Walsh, C. E. (1991). Testing intertemporal budget constraints: Theory and applications to U.S. federal budget and current account deficits. Journal of Money, Credit and Banking, 13, 210–223.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.School of EconomicsYonsei UniversitySeoulKorea
  2. 2.Department of EconomicsChonbuk National UniversityJeonju-siKorea

Personalised recommendations