Date Added: Mar 2011
The aim of this paper is to analyze how the primary government balance in Central and Eastern European countries reacts in the short term, in order to assess fiscal sustainability in the long run. For the purpose of this paper, a fiscal reaction function is used. Given the different orders of integration of the variables involved in the model, modified forms of the fiscal reaction function are considered. The results show that for Bulgaria, Czech Republic, Estonia, Hungary, and Lithuania fiscal policy reacts as expected - in the sense that governments have the ability to run a primary surplus - in the short term. This action makes fiscal sustainability easier to achieve in the long run.