Bootstrap Panel Granger-Causality Between Government Spending And Revenue In The EU

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Executive Summary

Using bootstrap panel analysis, allowing for cross-country correlation, without the need of pre-testing for unit roots, the authors study the causality between government revenue and spending for the EU in the period 1960-2006. Spend-and-tax causality is found for Italy, France, Spain, Greece, and Portugal, while tax-and-spend evidence is present for Germany, Belgium, Austria, Finland and the UK, and for several EU New Member States. Fiscal sustainability studies usually assess the existence of a long-term cointegration relationship between government revenue and spending. Nevertheless, an important feature linked to the existence of such cointegration relation is the direction of causality between spending and revenue, which conveys how fiscal policy is set-up in practice.

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