Heterogeneous dynamic panels Fiscal sustainability Mean re-version Panel stationarity test
In this paper, we test for the stationarity and sustainability of European
Union budget deficits over the period 1971 to 2006, using a panel of thirteen
member countries. Our testing strategy addresses two key concerns with re-
gard to unit root panel data testing, namely (i) the identification of which
members-states are stationary, and (ii) the presence of cross-sectional depen-
dence. We employ a moving block bootstrap approach to the Hadri (2000)
procedure that tests the null of joint stationarity. In contrast to the existing
literature, we find that the EU countries considered are characterised by fiscal
sustainability over the full sample period. This conclusion also holds when
analysing sub-periods based on before and after the Maastricht treaty.
This is a working paper. It is also available at: http://ideas.repec.org/p/lbo/lbowps/2007_13.html.