MATHEMATICAL MODELLING OF SOCIO-ECONOMIC PROCESSES AND SYSTEMS

Linear and nonlinear panel regression models for fiscal policy evaluation

  • 1 Faculty of Economics and Business, University of Maribor, Razlagova 14, Maribor, Slovenia

Abstract

In this paper, we analyse the relationship between the primary surplus/deficit and debt for the group of eleven Central and Eastern European EU countries. Temporary spending and temporary output are also added to the regression equation as explanatory variables. We use annual data for the period between 1997 and 2020, obtained from Eurostat. The estimated panel regression model passes the employed specification and diagnostic tests. Our analysis reveals there is a significant positive response of the primary surplus to an increase in debt, providing empirical support for the sustainability of fiscal policy in the observed panel of countries during the observed period.

Keywords

References

  1. Bartoletto, S., Chiarini, B., Marzano, E. (2012). The Sustainability of Fiscal Policy in Italy: A Long-Term Perspective. SSRN Electronic Journal. Available at SSRN: https://ssrn.com/abstract=2059964
  2. Bohn, H. (1991). Testing the sustainability of budget deficits in a stochastic economy. Mimeo, University of Pennsylvania.
  3. Bohn, H. (1998). The behavior of U.S. public debt and deficits. Quarterly Journal of Economics, Vol. 113, pp. 949–963.
  4. Bohn, H. (2005). The Sustainability of Fiscal Policy in the United States. CESifo Working Paper Series 1446, CESifo
  5. Bohn, H. (2008). The sustainability of fiscal policy in the United States. In Neck, R., Sturm, J. (Eds.). Sustainability of Public Debt (pp. 15–49). Cambridge: MIT Press.
  6. Eitrheim, Ø., Teräsvirta, T. (1996). Testing the adequacy of smooth transition autoregressive models. Journal of Econometrics, Vol. 74, Issue 1, pp. 59–76.
  7. Eurostat (2022). Economy and finance database. Available at: https://ec.europa.eu/eurostat/web/main/data/database. Retrieved in February 2022.
  8. González, A., Teräsvirta, T., van Dijk, D., Yang, Y. (2005). Panel Smooth Transition Regression Models, SSE/EFI Working Paper Series in Economics and Finance 604, Stockholm School of Economics, revised 11 Oct 2017.
  9. Kavkler, A. (2006). Econometric Models of Smooth Transition. Ph. D. Thesis. Vienna: Vienna University of Technology.
  10. Kavkler, A. (2021). Smooth transition regression approach to the analysis of the sustainability of fiscal policy in the United States of America. In: Vazov, G. (ed.). Actual issues of modern development of socio-economic systems in terms of the COVID-19 pandemic: scientific monograph. Sofia: VUZF Publishing House "St. Grigorii Bogoslov", p. 402-418.
  11. Kavkler, A., Böhm, B. (2003). Modelling Okun’s law for Germany with Smooth Transition Regression, Symposium in Operations Research ‟03 Proceedings, pp. 289 – 294.
  12. Lin, C. F. J., Teräsvirta, T. (1994). Testing the constancy of regression parameters against continuous structural change. Journal of Econometrics, Vol. 62, pp. 211 – 228.
  13. Luukkonen, R., Saikkonen, P., Teräsvirta, T. (1998a). Testing linearity against smooth transition autoregressive models. Biometrika, Vol. 75, pp. 491 – 499.
  14. Luukkonen, R., Saikkonen, P., Teräsvirta, T. (1998b). Testing linearity in univariate time series. Scandinavian Journal of Statistics, Vol. 15, pp. 161 – 175.
  15. Mendoza, E. G., Ostry, J. D. (2008). International Evidence on Fiscal Solvency: Is Fiscal Policy „Responsible‟? Journal of Monetary Economics, Vol. 55, pp. 1081-1093.
  16. Piergallini, A., Postigliola, M. (2013). Non-linear budgetary policies: Evidence from 150 years of Italian public finance. Economics Letters, Vol. 121, Issue 3, pp. 495-498.
  17. Piergallini A., Postigliola, M. (2016). The Sustainability of Fiscal Policy in Italy: a Nonlinear Perspective, manuscript.
  18. Piergallini, A., Postigliola, M. (2020). Evaluating the sustainability of Italian public finances. The North American Journal of Economics and Finance, Vol. 53(C).
  19. Simo, G. N. P. (2021). Sustainability of Fiscal Policy in Economic and Monetary Community of Central Africa: An Analysis Based on Panel Data. South Asian Journal of Social Studies and Economics, Vol. 9, Issue 3, pp. 1-7.
  20. Teräsvirta, T. (1994). Specification, estimation and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association, Vol. 89, Issue 425, pp. 208 – 218.
  21. Teräsvirta, T. (1998). Modelling economic relationships with smooth transition regression. In: Giles, D., Ullah, A., Ed., Handbook of Applied Economic Statistics. New York: Marcel Dekker, pp. 507-522.

Article full text

Download PDF