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Fiscal Sustainability Hypothesis Test in Central and Eastern Europe: A Panel Data Perspective

Benjamin Owusu
Benjamin Owusu
   | 27 oct 2021
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Publicado en línea: 27 oct 2021
Páginas: 285 - 312
DOI: https://doi.org/10.2478/ceej-2021-0021
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© 2021 Benjamin Owusu, published by Sciendo
This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Figure 1

Revenue, Expenditure, and public debt
Revenue, Expenditure, and public debt

Figure 2

Revenue, Expenditure, and public debt
Revenue, Expenditure, and public debt

Figure 3

Panel scatter plot
Panel scatter plot

Wald test of coefficient and confidence intervals

Models MG-FMOLS MG-DOLS
T stat −32.018*** −49.89***
Chi-square (1 df) 1,025.13 1,754.72
P-value 0.000 0.000
95% confidence intervals (0.934–0.941) (0.932–0.938)

Panel summary Statistics

Revenue-GDP ratio Expenditure-GDP ratio Debt-GDP ratio
Mean 0.391 0.419 0.340
Standard Deviation 0.039 0.505 0.178
Maximum 0.482 0.541 0.711
Minimum 0.308 0.321 0.038
Observations 250 250 250

Deficit to GDP ratio

Year Czh Est Hun Lat Lith Pol Svk Slvn Bulg Rom
1995 −12.44 1.05 −8.60 −1.43 −1.53 −4.26 −3.47 −8.15 −5.52 −2.00
1996 −3.01 −0.32 −4.38 −0.42 −3.22 −4.63 −9.82 −1.09 −8.11 −3.57
1997 −3.19 2.15 −5.55 1.42 −11.59 −4.61 −6.27 −2.31 0.76 −4.43
1998 −4.19 −0.73 −7.39 0.03 −3.03 −4.21 −5.30 −2.33 1.08 −3.24
1999 −3.14 −3.29 −5.23 −3.74 −2.82 −2.28 −7.17 −2.97 0.09 −4.42
2000 −3.57 −0.04 −2.980 −2.73 −3.17 −2.98 −12.63 −3.65 −0.53 −4.60
2001 −5.48 0.20 −3.94 −1.95 −3.51 −4.77 −7.22 −4.45 1.05 −3.46
2002 −6.36 0.42 −8.76 −2.29 −1.85 −4.85 −8.22 −2.37 −1.16 −1.93
2003 −6.89 1.82 −7.11 −1.46 −1.27 −6.08 −3.12 −2.56 −0.39 −1.43
2004 −2.39 2.34 −6.52 −0.92 −1.39 −5.04 −2.32 −1.94 1.80 −1.09
2005 −2.9 1.08 −7.72 −0.36 −0.34 −3.96 −2.87 −1.32 1.00 −0.81
2006 −2.17 2.87 −9.21 −0.49 −0.27 −3.56 −3.58 −1.23 1.81 −2.14
2007 −0.65 2.73 −5.03 −0.51 −0.81 −1.85 −2.05 −0.05 1.10 −2.73
2008 −1.98 −2.65 −3.73 −4.20 −3.09 −3.60 −2.52 −1.39 1.59 −5.35
2009 −5.45 −2.16 −4.69 −9.49 −9.13 −7.25 −8.15 −5.81 −4.05 −9.06
2010 −4.19 0.19 −4.39 −8.60 −6.92 −7.40 −7.46 −5.60 −3.13 −6.92
2011 −2.73 1.06 −5.19 −4.25 −8.95 −4.88 −4.46 −6.63 −1.98 −5.43
2012 −3.93 −0.29 −2.27 −1.22 −3.15 −3.74 −4.37 −4.0 −0.32 −3.65
2013 −1.25 0.18 −2.54 −1.17 −2.61 −4.18 −2.87 −14.58 −0.43 −2.10
2014 −2.10 0.70 −2.76 −1.44 −0.62 −3.65 −3.11 −5.51 −5.43 −1.19
2015 −0.61 0.14 −1.97 −1.36 −0.27 −2.62 −2.67 −2.85 −1.72 −0.61
2016 0.72 −0.52 −1.76 0.06 0.23 −2.37 −2.48 −1.94 0.09 −2.62
2017 1.56 −0.77 −2.38 −0.52 0.45 −1.46 −0.95 −0.01 1.10 −2.64
2018 1.09 −0.56 −2.29 −0.74 0.60 −0.24 −1.06 0.77 1.75 −2.96
2019 0.75 −0.30 −1.83 0.51 0.13 −1.16 −1.03 0.72 −0.11 −3.33

Panel Stationarity stationarity test with sharp breaks - – Robustness robustness check

Panel - – Panel test (revenue)
Model Level First difference
Break (Homogeneous) 1.762 (0.039)** 0.426 (0.335)
Breaks (Heterogeneous) 2.975 (0.001)*** 0.152 (0.440)
Panel B – Panel stationarity test (expenditure)
Model Level First difference
Break (Homogeneous) 1.687 (0.046)** 0.137 (0.446)
Breaks (Heterogeneous) 2.031 (0.021)** 0.630 (0.264)

Panel stationarity test – Expenditure

Countries Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.070 0.309 0.302 0.050* 0.059 0.050
Estonia 0.099 0.410* 0.331 0.052* 0.124* 0.125*
Hungary. 0.203** 0.298 0.201 0.044 0.101 0.091
Latvia 0.183** 0.504** 0.414* 0.051* 0.080 0.083
Lithuania 0.052 0.055 0.116 0.051* 0.043 0.051
Poland 0.182** 0.496* 0.416* 0.053* 0.056 0.076
Slovakia 0.048 0.219 0.197 0.040 0.145** 0.139*
Slovenia 0.059 0.189 0.322 0.054* 0.097 0.085
Bulgaria 0.148** 0.089 0.095 0.051* 0.088 0.087
Romania 0.124 0.313 0.181 0.053* 0.136** 0.133*
Panel statistic 2.995*** 3.508*** 2.282*** 4.938*** 3.309*** 2.460***
(0.001) (0.000) (0.011) (0.000) (0.000) (0.007)

Panel stationarity Test test -– First first difference of Revenuerevenue

Countrs Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.127 0.075 0.074 0.044 0.057 0.074
Estonia 0.093 0.082 0.117 0.051* 0.071 0.111
Hungary. 0.038 0.151 0.159 0.031 0.148** 0.153**
Latvia 0.063 0.062 0.107 0.047 0.052 0.056
Lithuania 0.081 0.122 0.079 0.061** 0.082 0.077
Poland 0.088 0.128 0.157 0.057** 0.056 0.060
Slovakia 0.108 0.531** 0.423* 0.076*** 0.120* 0.099
Slovenia 0.061 0.108 0.117 0.057** 0.101 0.077
Bulgaria 0.180** 0.327 0.366* 0.027 0.149** 0.159**
Romania 0.038 0.065 0.083 0.035 0.048 0.041
Panel statistic 1.282 0.574 0.292 4.723*** 2.965*** 2.357***
(0.100) (0.283) (0.385) (0.000) (0.002) (0.009)

Chow test of poolability of coefficients (5% significance level)

Restricted model Intercept F-statistics P-value Verdict
FE (within) Variable 2.8438 0.004 Not poolable
Pooled OLS Fixed 14.892 0.000 Not poolable

Panel stationarity test – first difference of expenditure

Countries Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.195** 0.170 0.132 0.059** 0.094 0.093
Estonia 0.032 0.033 0.065 0.031 0.035 0.031
Hungary. 0.078 0.091 0.110 0.048* 0.089 0.107
Latvia 0.057 0.126 0.070 0.046 0.050 0.046
Lithuania 0.078 0.148 0.080 0.053* 0.097 0.060
Poland 0.075 0.044 0.055 0.045 0.038 0.051
Slovakia 0.122 0.136 0.137 0.047 0.083 0.088
Slovenia 0.064 0.131 0.097 0.060** 0.111* 0.096
Bulgaria 0.069 0.114 0.123 0.031 0.091 0.096
Romania 0.053 0.069 0.181 0.052* 0.040 0.068
Panel statistic 0.970 −0.827 −1.336 4.437*** 1.674** 1.034
(0.166) (0.796) (0.909) (0.000) (0.047) (0.151)

Panel stationarity test – first difference of cyclically adjusted expenditure

Countries Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.224** 0.255 0.298 0.140*** 0.142** 0.137*
Estonia 0.041 0.105 0.061 0.037 0.043 0.045
Hungary. 0.059 0.141 0.144 0.045 0.141** 0.131*
Latvia 0.076 0.075 0.068 0.056** 0.063 0.068
Lithuania 0.121 0.211 0.194 0.119*** 0.126* 0.118*
Poland 0.193* 0.191 0.198 0.051* 0.120* 0.144**
Slovakia 0.044 0.304 0.204 0.036 0.036 0.063
Slovenia 0.138* 0.189 0.147 0.108*** 0.137** 0.074
Bulgaria 0.102 0.073 0.142 0.049* 0.051 0.061
Romania 0.042 0.147 0.055 0.038 0.048 0.044
Panel statistic 2.237** 0.668 −0.086 9.258*** 3.130*** 2.196**
(0.013) (0.252) (0.532) (0.000) (0.001) (0.014)

Panel stationarity test – Revenue

Countries Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.146* 0.314 0.408* 0.047 0.048 0.068
Estonia 0.157* 0.271 0.108 0.044 0.066 0.091
Hungary. 0.342*** 0.187 0.148 0.040 0.107* 0.103
Latvia 0.070 0.448** 0.313 0.052* 0.074 0.076
Lithuania 0.074 0.155 0.299 0.051* 0.076 0.054
Poland 0.170* 0.409* 0.352* 0.065** 0.101 0.103
Slovakia 0.262** 0.371* 0.362* 0.057** 0.153** 0.143**
Slovenia 0.056 0.128 0.239 0.056* 0.079 0.074
Bulgaria 0.268** 0.115 0.121 0.065** 0.114* 0.102
Romania 0.074 0.151 0.160 0.049* 0.121* 0.116*
Panel statistic 5.652*** 2.716*** 2.136*** 5.606*** 3.405*** 2.523***
(0.000) (0.003) (0.016) (0.000) (0.000) (0.006)

Panel cointegration test of revenue and expenditure – Europe

Zτ (N) Zφ(N)
Models Value (τ) P-value Value (φ) P-value
No breaks −1.515 0.065 −0.963 0.168
Level break 0.879 0.810 0.690 0.755
Regime shift 0.422 0.663 0.437 0.669
Number of observations 250 250

Panel cointegration test of cyclically adjusted revenue and cyclically adjusted spending (HP Filter used for detrending series)

Zτ(N) Zφ(N)
Models Value (τ) P-value Value (φ) P-value
No breaks 1.731 0.958 −2.409*** 0.008
Level break −1.984** 0.024 −2.490*** 0.006
Regime shift −6.050*** 0.000 −7.182*** 0.000
Number of observations 250 250

Panel stationarity Test test -– First first difference of cyclically adjusted revenue

Countrs Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.060 0.092 0.168 0.058** 0.068 0.067
Estonia 0.043 0.073 0.097 0.039 0.067 0.086
Hungary. 0.042 0.071 0.121 0.040 0.071 0.122*
Latvia 0.093 0.096 0.092 0.093*** 0.096 0.088
Lithuania 0.166* 0.496** 0.303 0.103*** 0.130* 0.104
Poland 0.217** 0.187 0.286 0.033 0.071 0.089
Slovakia 0.102 0.244 0.214 0.102*** 0.104* 0.095
Slovenia 0.131 0.172 0.185 0.114*** 0.197** 0.088
Bulgaria 0.1068 0.085 0.117 0.063** 0.077 0.116*
Romania 0.120 0.071 0.052 0.039 0.047 0.042
Panel statistic 2.244** 0.421 0.190 9.430*** 3.306*** 2.275**
(0.012) (0.337) (0.425) (0.000) (0.000) (0.011)

Summary of existing empirical panel fiscal sustainability test

Reference Sustainability test Period and country Findings
Afonso and Rault (2010) Stationarity of debt and cointegration between revenue and expenditure 15 Selected EU countries (1970–2006) Fiscal stance sustainability confirmed
Baldi and Staehr (2015) Estimated fiscal reaction function of primary balance, debt and business cycle viables Different groups of EU countries (2001–2004) Sustainable fiscal stance for all groups post financial crises
Beqiraj et al. (2018) Panel cointegration test between primary balance and public debt 21 OECD countries (1991–2015) Fiscal stance judged to be unsustainable
Boekemeier and Stoian (2018) Fiscal reaction function of primary balance and debt CEEC (1997–2013) Fiscal stance sustainable for selected countries
Brady and Magazzino (2018) Stationarity of public debt 19 European countries (1970–2016) Fiscal stance sustainability confirmed
Checherita-Wesphal and Žďárek (2017) Fiscal reaction function of primary balance response to debt 18 Euro Area countries (1970–2013) Sustainable fiscal stance
Claeys (2007) Cointegration between revenue, spending and net interest payment Selected European countries (1970–2001) Sustainable fiscal policy
Krajewski et al. (2016) Cointegration between revenue and expenditure and a fiscal reaction function CEEC (1990–2012) Sustainable fiscal stance
Lee et al. (2018) Fiscal reaction function of primary balance response to debt EU regional groups (1950–2014) Varied results depending on the region
Llorca and Redzepagic (2008) Cointegration between revenue and expenditure CEEC (1999:1–2006:1) Fiscal stance sustainable in selected countries
Prohl and Schneider (2006) Cointegration between budget deficit and public debt 15 EU countries (1970–2004) Fiscal stance sustainability confirmed
Westerlund and Prohl (2010) Cointegration between revenue and expenditure 8 rich OECD countries (1977:1–2006:4) Sustainability hypothesis confirmed for selected countries

Breusch–Pagan and Pesaran cross-sectional dependence test

Variables Breusch–Pagan CD test Pesaran CD test
Chi-square, P-value z-value, P-value
Expenditure to GDP ratio 107.84, 0.000 5.494, 0.000
Revenue to GDP ratio 113.42, 0.000 1.716, 0.0862

Long run coefficient for cyclically adjusted fiscal variables

Stat MG CCEMG MG-FMOLS MG-DOLSa
γ 0.499 0.364 0.938 0.935
Test stat 3.390 3.815 480.74 604.07
P-value 0.000 0.000 0.000 0.000
Std error 0.147 0.095 0.002 0.02
Obs 220 220 210 130
Shapiro–Wilk Normality test 0.970 0.977 0.992 0.986
P-value (0.000) (0.001) (0.260) (0.220)
Peseran CD test 3.652 −2.411 3.328 −0.260
P-value (0.000) (0.016) (0.001) (0.795)

Panel stationarity test – cyclically adjusted expenditure

Countries Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.144* 0.165 0.132 0.065** 0.134** 0.126**
Estonia 0.080 0.401 0.385* 0.046 0.105* 0.092
Hungary. 0.157* 0.096 0.068 0.059** 0.100 0.126**
Latvia 0.106 0.202 0.155 0.045 0.080 0.073
Lithuania 0.089 0.172 0.146 0.072*** 0.135** 0.126**
Poland 0.154* 0.466** 0.577** 0.047 0.074 0.073
Slovakia 0.095 0.258 0.206 0.063** 0.146** 0.126**
Slovenia 0.091 0.488** 0.332 0.070** 0.140** 0.093
Bulgaria 0.102 0.072 0.097 0.068** 0.072 0.065
Romania 0.064 0.087 0.110 0.049* 0.089 0.110
Panel statistic 2.491*** 2.376*** 1.461* 7.017*** 4.511*** 2.885***
(0.006) (0.009) (0.072) (0.000) (0.000) (0.002)

Dates of structural breaks for individual series

Countries (CEEC) Revenue Expenditure
Czechia 2002, 2010 2003
Estonia 1998, 2008, 2011 1999, 2007, 2010
Hungary 1997, 2006, 2011, 2015 1998, 2001, 2015
Latvia 1999, 2009 1997, 2000, 2008, 2011
Lithuania 2000 2000, 2008, 2011
Poland 1997, 2008, 2015 1997, 2011
Slovakia 1997, 2000, 2003, 2012 2002, 2008
Slovenia 2011, 2015 2008, 2015
Bulgaria 1997, 2008, 2012 1998, 2002
Romania 1997 1998, 2001, 2006, 2012

Panel Cointegration cointegration test of cyclically adjusted revenue and cyclically adjusted spending

Zτ(N) Zφ(N)
Models Value (τ) P-value Value (φ) P-value
No breaks −2.842*** 0.002 −3.587*** 0.000
Level break −3.076*** 0.001 −2.950*** 0.002
Regime shift −2.368*** 0.009 −2.984*** 0.001
Number of observations 220 220

Panel stationarity Test test -– Cyclically cyclically adjusted revenue

Countrs Constant Constant and trend
k = 1 k = 2 k = 3 k = 1 k = 2 k = 3
Czechia 0.160* 0.416** 0.519** 0.048* 0.070 0.060
Estonia 0.079 0.414* 0.249 0.044 0.042 0.089
Hungary 0.040 0.398* 0.348* 0.039 0.058 0.103
Latvia 0.037 0.324* 0.356* 0.037 0.036 0.051
Lithuania 0.061 0.242 0.165 0.059** 0.145** 0.111
Poland 0.241** 0.434** 0.435* 0.078*** 0.056 0.072
Slovakia 0.080 0.262 0.230 0.056** 0.149** 0.123*
Slovenia 0.097 0.237 0.261 0.075*** 0.132* 0.066
Bulgaria 0.040 0.281 0.343* 0.037 0.035 0.071
Romania 0.083 0.246 0.338 0.054* 0.044 0.073
Panel statistic 1.524*** 4.395*** 3.768*** 5.575*** 1.985** 1.682**
(0.064) (0.000) (0.000) (0.000) (0.023) (0.046)
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