3-Step Analysis Of Public Finances Sustainability: The Case Of The European Union
Source: European Central Bank
The authors use a 3-step analysis to assess the sustainability of public finances in the EU27. Firstly, they perform the SURADF specific panel unit root test to investigate the mean-reverting behaviour of general government expenditure and revenue ratios. Secondly, they apply the bootstrap panel cointegration techniques that account for the time series and cross-sectional dependencies of the regression error. Thirdly, they check for a structural long-run equation between general government expenditures and revenues via SUR analysis. While results imply that public finances were not unsustainable for the EU panel, fiscal sustainability is an issue in most countries, with a below unit estimated coefficient of expenditure in the cointegration relation with revenue as the dependent variable.