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Working Paper (2012-08) - The long-term sustainability of public finances: an econometric evaluation

Working Paper (2012-08) - The long-term sustainability of public finances: an econometric evaluation

08/11/12

 

This paper proposes to measure the long-term sustainability of public finances in the G7 countries between 1960 and 2006. Specifically, it assesses the strength of the link between revenue and expenditure by a fractional approach that ensures the inclusion account of budgetary imbalances spread over time, without being cumulative.

This allows to avoid the critical Bohn (2007), in which econometric tests are ill-suited to test the sustainability of public finances since the intertemporal budget constraint requires very low public econometric restrictions. The goal is not so much whether the public budget constraint is satisfied, or not, to estimate the rate at which imbalances are resolved.

Three results are highlighted.

Firstly , the estimation of long memory residues of long-term relationships between revenue and expenditure highlights two polar cases: for Germany, three-quarters of a shock is absorbed in less than five years, while it takes more than fifteen years in Italy. Between the two are France and the UK closer to the German model, and the United States, Canada and Japan, the second closest. Secondly , the estimation of model error correction fractional indicates for each country, according to the sign of the coefficients, the restoring forces exerted in the dynamics of income and expenditure in different countries, with the exception of Italian expenditure, which show a domino effect snow. The difference between France and Germany, in terms of value and significance of the coefficients across the model error correction lies solely in the management of the restoring force on public expenditure: significant at 1% in Germany, it is not significant at 10% in France. Thirdly , the aggregation of different fiscal imbalances more or less persistent within a State may be a major cause of persistent global imbalances. Thus, the reduction of persistent fiscal imbalances in Germany, France, the United States and the United Kingdom, with a time horizon of five years, spend less of their overall decline as a decrease in the share of budgets less subject to fiscal adjustments. This reduction can be achieved for the benefit of budgets usually know the fastest adjustments, without calling into question the continued decline in overall deficits. For countries with fiscal imbalances are the most persistent global (Canada, Japan and Italy), the dominant effect, a horizon of five years, however, is the higher average of the various internal imbalances.


  •  Classi cation : JEL: C22, C43, E62
  • Keywords : Fiscal Policy, Sustainability, long memory, fractional cointegration
  • Author: Thomas Brand, Department of Economics and Finance
  • No. 2012-08, November 2012

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