A Synthesis of Empirical Research in the Sustainability of Fiscal Policy

Abstract

In the last twenty years many developed countries have faced significant public deficits, while the ability of government authorities to deal with public deficits has been receiving rising awareness from economists and policy makers. This is an imperative topic, in provisions of economics and public policy, and it is a central subject for the EMU area; hence, they are the main motivations of this paper. Theoretically, equilibrium growth paths have to be supported by adequate fiscal policy. The risk of a default on Greek sovereign debt during the last years has worried the Euro into its first serious crisis and raised the issue of debt sustainability in Europe. There is no universally accepted definition for sustainable fiscal policy. However, economists agree that expanding public debt is not sustainable. Budget policy is constrained by the need to finance the deficit. In this paper we provide a synthesis of empirical research in the validity of the Sustainability of Fiscal Policy of the existing literature for the period 1986-2012. These studies used both time series and panel data sets and empirically examined the Sustainability of fiscal policy for a single country and for a group of countries (multi-country studies). Furthermore, there are studies using data on government expenditure at the provincial or state level. Existing studies in this topic vary in the country selection. They used data for developed, developing countries or group of both, while most of them examined developed or industrial countries. All these studies found different empirical results: support, no support or mixed results.