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Oxford Economic Papers Advance Access originally published online on January 6, 2007
Oxford Economic Papers 2007 59(2):194-218; doi:10.1093/oep/gpl035
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Right arrow E62 - Fiscal Policy
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© Oxford University Press 2007 All rights reserved

Debt sustainability in the European Monetary Union: Theory and empirical evidence for selected countries

Alfred Greiner*, Uwe Köller{dagger}, and Willi Semmler{ddagger}

*Department of Business Administration and Economics, Bielefeld University, P.O. Box 100131, 33501 Bielefeld, Germany; email: agreiner{at}wiwi.uni-bielefeld.de
{dagger}Bielefeld University
{ddagger}Bielefeld University and New School University, New York


  Abstract

This paper studies the sustainability of fiscal policy for selected Euro-area countries. We focus on those countries that either have a high debt to GDP ratio (Italy) or have recently violated the Maastricht treaty by permitting more than three percent of the deficit to GDP ratio (France, Germany, and Portugal). We apply an approach developed by Bohn who proposes to study whether the primary surplus to GDP ratio is a positive function of the debt to GDP ratio which does not need arbitrary discount rates that other approaches have to assume. By controlling for the impact of other variables in this process, we can show that for the above mentioned countries fiscal policy shows evidence for sustainability, although the three percent rule of the Maastricht treaty might temporarily be violated. We also compare our results from the Euro-area countries to results obtained for the US fiscal policy.

Key Words: JEL classifications: H63 • E62


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