8/2011 Juan Carlos Cuestas and Karsten Staehr. Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe

Working Papers of Eesti Pank. No. 8/2011

This paper analyses the time series properties of the fiscal balance in the 10 EU countries from Central and Eastern Europe. The persistence of shocks in the variable is analysed by means of unit root tests that account for the possibility of non-linearities and structural changes. The results of linear and non-linear unit root tests find only mild evidence in favour of the stationarity hypothesis, with asymmetric effects present in a few cases. After controlling for structural changes in the data generation process, the results point to stochastic stationarity of the series. Thus, in spite of relatively steady headline figures, the public balance processes exhibit substantial instability in the EU countries from Central and Eastern Europe.
JEL Code: C32, E24
Key words: unit roots, structural breaks, budget balance, EU

* Juan Carlos Cuestas is a Lecturer at the University of Sheffield, United Kingdom. Karsten Staehr is a Professor at the Tallinn University of Technology and a Research Supervisor at Eesti Pank. The authors would like to thank Arne Risa Hole and Mai Le for valuable comments. The usual disclaimer applies. J. C. Cuestas acknowledges financial support from the CICYT project ECO2008-05908-C02-01/ECON and Junta de Castilla y León SA003B10-1.

Author's e-mail address: j.cuestas [at] sheffield.ac.uk

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. A first look at the data
3. Econometric methods
4. Data
5. Empirical results
6. Conclusions
References

Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe, Working Papers of Eesti Pank No 8/2011 (PDF)