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Volume 60, Issue 6


Fiscal Policy Reaction in the Short Term for Assessing Fiscal Sustainability in the Long Runin Central and Eastern European Countries

Câmpeanu, Emilia; Stoian, Andreea

Year: 2010   Volume: 60   Issue: 6   Pages: 501-518

Abstract: The aim of this paper is to analyze how the primary government balance in Central and Eastern European countries reacts in the short term, in order to assess fiscal sustainability in the long run. For the purpose of this study, a fiscal reaction function is used. Given the different orders of integration of the variables involved in the model, modified forms of the fiscal reaction function are considered. The results show that for Bulgaria, Czech Republic, Estonia, Hungary, and Lithuania fiscal policy reacts as expected – in the sense that governments have the ability to run a primary surplus – in the short term. This action makes fiscal sustainability easier to achieve in the long run. On the other hand, for Latvia, Poland, Romania, and Slovakia, sustainable fiscal policy will be more difficult to attain given the opposite response of governments to public debt shocks. In these countries, severe fiscal adjustments should be made in order to reach fiscal sustainability in the long run.

JEL classification: E62, H62, H63

Keywords: fiscal sustainability, fiscal reaction function, primary balance, public debt, budget balance


RePEc: http://ideas.repec.org/a/fau/fauart/v60y2010i6p501-518.html

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