Multi-step Analysis of Public Finances

We use an original multi-step analysis to assess the sustainability of public finances. First, we investigate the mean-reverting behaviour of government expenditures and revenues. Second, we apply bootstrap panel cointegration techniques to check for a long-run relationship between expenditures and revenues. Third, we check the coefficient of expenditure in the cointegration relation. Fourth, we estimate panel error correction models to sort out short- and long-run fiscal developments. While results imply that public finances were not unsustainable for the EU panel, fiscal sustainability is an issue in most countries, with a below unit estimated coefficient of expenditure in the cointegration relation