The extent of government deficits and debt has been one of the most debated issues in recent years. However, very little has been contributed about their dynamics. Yet, the issue of entering into and exiting from excessive deficits will be critical in the European monetary union since the Stability and Growth Pact rules out deficits larger than three percent of GDP, except strictly defined unusual conditions. This paper provides a transition data analysis of the dynamics of public deficits. It shows the asymmetric role played by the economic determinants in this dynamics and estimates the evolution of the probability of entering into and exiting from excessive deficits for each one of the member states of the European Union since 1970. It also reveals how the concurrence of some minor changes may produce a major switchover in public finance outcomes. Finally, it points to the fragility of some countries even if they are now out of excessive deficits.
Get full access to this article
View all access options for this article.
References
1.
AhmedS. (1996), Balanced-Budget Rules and Public Deficits: Evidence from the US States. A Comment, Carnegie-Rochester Conference Series on Public Policy, Vol. 45, pp. 77–87.
2.
AlesinaA. and BayoumiT. (1996), The Costs and Benefits of Fiscal Rules: Evidence from US States, NBER Working Paper, No. 5614.
3.
AlesinaA. and PerottiR. (1995), The Political Economy of Budget Deficits, IMF Staff Papers, Vol. 42, No. 1, pp. 1–31.
4.
AlesinaA. and PerottiR. (1995), Fiscal Expansions and Adjustments in OECD Countries, Economic Policy, No. 21, pp. 1–42.
5.
AlesinaA. and PerottiR. (1996), Fiscal Discipline and the Budget Process, American Economic Review, Vol. 86, No. 2, pp. 401–407.
6.
AlesinaA. and PerottiR. (1996), Budget Deficits and Budget Institutions, NBER Working Paper, No. 5556.
7.
AlesinaA. and PerottiR. (1997), Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects, IMF Staff Papers, Vol. 44, No. 2, pp. 210–248.
8.
BarryF. and DevreuxM. B. (1995), The Expansionary Fiscal Contraction Hypothesis: A Neo-Keynesian Analysis, Oxford Economic Papers, Vol. 47, No. 3, pp. 249–264.
9.
BartoliniL.RazinA., and SymanskyS. (1995), G7 Fiscal Restructuring in the 1990s: Macroeconomic Effects, Economic Policy, No. 20, pp. 109–146.
10.
BayarA. H.DramaisA.RoegerW., and J. in t Veld, (1997), Macroeconomic Effects of Fiscal Restructuring in Europe, in Hairault, J.-O., P.-HéninY., and PortierF., Business Cycles and Macroeconomic Stability, Kluwer Academic Publishers, Boston, pp. 321–336.
11.
BayoumiT. and EichengreenB. (1995), Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization, IMF Staff Papers, Vol. 42, No. 1, pp. 32–48.
12.
BertolaG. and DrazenA. (1993), Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity, American Economic review, Vol. 83, No. 1, pp. 11–26.
13.
BohnH. and InmanR. P. (1996), Balanced-Budget Rules and Public Deficits: Evidence from the US States, Carnegie-Rochester Conference Series on Public Policy, Vol. 45, pp. 13–76.
14.
BuiterW.CorsettiG., and RoubiniN. (1993), Excessive Deficits: Sense and Nonsense in the Treaty of Maastricht, Economic Policy, No. 16, pp. 58–100.
15.
ButiM.FrancoD., and OngenaH. (1997), Budgetary Policies during Recessions. Retrospective Application of the Stability and Growth Pact to Post-War Period, Economic Papers, European Commission, No. 121.
16.
CorsettiG. and RoubiniN. (1996), European versus American Perspectives on Balanced-Budget Rules, American Economic Review, Vol. 86, No. 2, pp. 408–413.
17.
CourPh E. Dubois, MahfouzS., and J. Pisani-Ferry, (1996), The Cost of Fiscal Retrenchment Revisited: How Strong is the Evidence?, INSEE, Document de travail, No. G9612.
18.
CoxD. R. (1972), Regression Models and Life Tables, Journal of the Royal Statistical Society, Vol. B 34, pp. 187–220.
19.
GiavazziF. and PaganoM. (1990), Can Severe Fiscal Contractions be Expansionary? A Tale of Two Small Economies, in: BlanchardO. B. and FischerS. (Eds.), NBER Macroeconomics Annual, pp. 75–110.
20.
GiavazziF. and PaganoM. (1995), Non-Keynesian Effects of Fiscal Policy Changes: More International Evidence, Paper presented at the conference Growing Government Debt: International Experiences, Stockholm, 12 June 1995.
21.
GrilliV.MasciandaroD., and TabelliniG. Institutions and Policies, Economic Policy, No. 13, pp. 341–392.
22.
HeylenF. (1997), A Contribution to the Empirical Analysis of the Effects of Fiscal Consolidation: Explanation of Failure in Europe in the 1990s, paper presented at the conference Public Deficits and Union Monetary, November 27–28, Rome.
23.
Hughes HallettA. J. and McAdamP., (1997), Large Scale Fiscal Contractions in Europe: the Costs, Benefits and Likely Outcomes, Manuscript, University of Strathclyde.
24.
LancasterT. (1990), The Econometric Analysis of Transition Data, Cambridge, Cambridge University Press.
25.
MassonP. R. (1996), Fiscal Dimensions of EMU, Economic Journal, Vol. 106, No. 437, pp. 996–1004.
26.
McDermottC. J. and WescottR. F. (1996), An Empirical Analysis of Fiscal Adjustments, IMF Staff Papers, Vol. 43, No. 4, pp. 725–753.
27.
PerottiR. (1996), Fiscal Consolidation in Europe: Composition Matters, American Economic Review, Vol. 86, No. 2, pp. 105–110.
28.
PerottiR.StrauchR., and J. von Hagen (1998), Sustainable Public Finances. London: CEPR
29.
PoterbaJ. M. (1996), Budget Institutions and Fiscal Policy in the US States, American Economic Review, Vol. 86, No. 2, pp. 395–400.
30.
RoubiniN. and SachsJ. D. (1989), Political and Economic Determinants of Budget Deficits in the Industrial Democracies, European Economic Review, Vol. 33, No. 5, pp. 903–938.
31.
RoubiniN. (1995), The Economics of Fiscal Bondage: the Balanced Budget Amendment and Other Binding Fiscal Rules, Manuscript, Yale University.
32.
StrauchR., and J. von Hagen (forthcoming), Fiscal Consolidations: Quality, Economic Conditions, and Success, Public Choice
33.
Von HagenJ., (1991), A Note on the Empirical Effectiveness of Formal Fiscal Restraints. Journal of Public Economics44, 199–210
34.
von HagenJ., (1992), Budgeting Procedures and Fiscal Performance in the European Communities, Economic Papers, Commission of the European Communities, No. 96.
35.
Von HagenJ., and HardenI. (1994), National Budget Processes and Fiscal Performance. European Economy, Reports and Studies 3, 311–418
