Policy Regime Changes and the Long-Run Sustainability of Fiscal Policy: An Application to Greece
Paper number: 96/01
Paper Category: Discussion Paper
Centre of Planning and Economic Research
Department of Economics, University of Exeter
Centre of Planning
This paper questions the widespread practice of assessing the hypothesis of long-run fiscal policy sustainability by means of conventional unit-root tests that do not allow for the possible impact of regime shifts. Using the Greek economy as a model case, the Zivot-Andrews sequential integratibility testing procedure which allows for the endogenous determination of possible regime changes is deployed to this end. The empirical evidence reached supports strongly the failure of the Greek government to satisfy intertemporal budget balance in the long-run and identifies as the cause of this failure a deterministic policy regime shift taking place in 1975.
JEL Classification Nos: E62, H62, H63
Keywords: Fiscal policy sustainability, Persistent deficits, Government debt, Unit roots
Corresponding Authors: Stelios Makrydakis, 22 Hippokratous str., 10680 Athens, Greece
Elias Tzavalis, Amory Building, Rennes Drive, Exeter, EX4 4RJ, Great Britain, tel: (44) 1392 264481, fax: (44) 1392 263242, email: E.Tzavalis@exeter.ac.uk
*The views expressed in this article are those of the authors and do not necessarily represent those of the Centre of Planning and Economic Research. An earlier version of the paper was presented at the Centre of Planning and Economic Research staff seminar. We wish to thank seminar participants for their constructive criticism. We are also indebted to B. Lockwood, A. Phillipopoulos, Z. Psaradakis and Y. Stournaras for their insightful comments. Natuarlly the authors are responsible for any remaining errors.