Which country after Greece? Sustainability of budget deficits in selected EU countries: A panel cointegration analysis with multiple structural breaks under cross-section dependence

Abstract

The sustainability of budget deficits is one of the most important macroeconomic problems in countries. High public spending and insufficiency of public revenue are the main reasons for the collapsing of Greek, Italy, Spain, Portugal and Ireland economies. In this study, the sustainability of budget deficit has been examined for 17 EU countries by means of panel cointegration with multiple structural breaks under cross-section dependence, for the period of 1996-2012. At the end of the analysis; cross-section dependence was determined in these countries. Therefore, an economic shock that comes to one of these countries also affects the others. According to the long-run analysis, budget deficits of these countries are sustainable in weak form.

Keywords

• sustainability of budget deficits
• cross-sectional dependence