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Government Solvency: Revisiting some EMU countries

Arghyrou, Michael Georgiou ORCID: and Luintel, Kul ORCID: 2007. Government Solvency: Revisiting some EMU countries. Journal of Macroeconomics 29 (2) , pp. 387-410. 10.1016/j.jmacro.2005.09.001

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Corsetti and Roubini [Corsetti, G., Roubini, N., 1991. Fiscal deficits, public debt and government solvency: Evidence from OECD countries. Journal of Japanese and International Economies 5, 354–380] reported that the government finances of Greece, Ireland, Italy and the Netherlands (now all EMU countries) did not satisfy the intertemporal budget constraint (IBC). We re-examine this issue by utilizing a new empirical approach and extended data sets. Issues of structural shifts and non-linear fiscal adjustment are tackled. We find that: (i) the fiscal path of these countries went through multiple shifts; (ii) most of these shifts correspond to important policy changes and/or external shocks; (iii) the government finances of all four countries satisfy the IBC across different time horizons; and (iv) fiscal disequilibrium adjusts non-linearly. We also find a clear positive Maastricht effect on the IBC of all countries.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Uncontrolled Keywords: Intertemporal budget constraint; Strong and weak form sustainability; Structural breaks; Non-linear adjustment
ISSN: 01640704
Last Modified: 17 Oct 2022 09:14

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