Structural breaks in public finances in Central and Eastern European countries

Abstract

This article studies the evolution of quarterly government Total Deficit (TD) to Gross Domestic Product (GDP) and debt to GDP ratios of seven Central and Eastern European member states (CEEC-7) of the European Union over the period 2000 Q1 to 2011 Q2. Alternative unit root tests are applied to identify the number and date(s) of structural break(s) in the fiscal ratios. The breakpoint date(s) are estimated endogenously. The best performing unit root test is determined by the adjusted R-squared metric. The level and trend of fiscal ratios are estimated by using breaking trend regression models. Unit root tests performed for the period 2000 Q1 to 2007 Q4 identify the number and date(s) of structural break(s) in fiscal variables before the global economic crisis. Unit root tests and breaking trend regressions are estimated for total Eurozone TD to GDP and debt to GDP to compare the evolution of total Eurozone fiscal ratios with those of each CEEC-7.