Sustainability of Public Debt in Germany – Historical Considerations and Time Series Evidence (original) (raw)
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In the last decades, the majority of OECD countries has experienced a continuous increase in public debt. The European debt crisis has prompted a fundamental re-evaluation of public debt sustainability and the looming threat of sovereign debt default. Due to a multitude of large scale events in its past, Germany is far from being an exception: In fact, Germany's peacetime debt-to-GDP (Gross Domestic Product) ratio has never been higher. In this paper, we analyse the sustainability of Germany's public finances against the standard theoretical back-ground using a unique database, retrieved from multiple sources covering the period from 1850 to 2010. Multiple currency crises and external events offer anecdotal evidence, contradicting the historical perception of Germany as the poster child of European public finance. Given these corresponding breaks in time series, the empirical analysis is conducted for the subperiods 1872-1913 and 1950-2010. In addition to an anecdotal his-torical analysis, we conduct formal tests on fiscal sustainability, including tests on stationarity and cointegration and the estimation of Vector Autoregression (VAR) and Vector Error Correction Models (VECM). While we cannot reject the hypothesis that fiscal policy was sustainable in the period before the First World War, the tests allow for a rejection of the hypothesis of fiscal sustainability for the period from 1950 to 2010. This evidence leads to the conclusion that Germany's public debt is in dire need of consolidation. Albeit a much needed reform, the incompleteness of the German debt brake will have to be addressed in the coming years, in order to ensure that fiscal consolidation actually takes place. JEL-Code: H620, H630.
Testing the sustainability of German fiscal policy: evidence for the period 1960–2003
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In this paper we test whether German public debt has been sustainable by testing how the primary surplus to GDP ratio reacts to the debt to GDP ratio. We apply semi-parametric regressions with time depending coefficients. This test shows that the mean of the coefficient relevant for sustainability is significantly positive over the time period considered. However, there is a negative trend in that coefficient which seems to have ceased to decline only in the middle to late 1990s.
Testing Sustainability of German Fiscal Policy. Evidence for the Period 1960 � 2003
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In this paper we test whether German public debt has been sustainable by testing how the primary surplus to GDP ratio reacts to the debt to GDP ratio. We apply semi-parametric regressions with time depending coefficients. This test shows that the mean of the coefficient relevant for sustainability is significantly positive over the time period considered. However, there is a negative trend in that coefficient which seems to have ceased to decline only in the middle to late 1990s.
Fiscal Sustainability of the German Laender Time Series Evidence
In this paper we analyze the sustainability of public finances in the states (Laender) of the Federal Republic of Germany using an unprecedentedly comprehensive fiscal dataset for the time period from 1950 to 2011 for West German Laender and 1991 to 2011 for East German Laender, respectively. In order to assess the fiscal sustainability of the (Laender) we, first, examine the stationarity characteristics of public debt, revenues and expenditures. Second, we explore the long-run relation between expenditures and revenues in a cointegration analysis within each Land. The results provide evidence against strict fiscal sustainability in most of the 16 German Laender. A notable exception to this finding is Bavaria. JEL-Code: H620, H770, H720.
Panel Cointegration Tests on the Fiscal Sustainability of German Laender
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Fiscal Policy Sustainability: Some Unpleasant European Evidence
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The sustainability of fiscal deficits has been receiving increasing attention from economists. The issue is paramount for the newly formed Euro area and this is one of the motivations of the paper. In order to assess the sustainability of budget deficits in the Euro area, stationarity tests for the stock of public debt and co-integration tests between public expenditures and public revenues are performed for the Euro countries for the 1968-1997 period. The empirical results allow us to conclude that fiscal policy may not be sustainable for most countries with the possible exceptions of Germany, Austria and the Netherlands.
How to assess public debt sustainability : Empirical evidence for the advanced European countries
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In the context of a society with limited resources, borrowing seems to be a desirable method that allows governments to finance the required expenditures. But government borrowing is accepted as long as it is consistent with a sound fiscal policy. Since 1923, when the concept of sound finance was brought into discussion for the first time, by J. M. Keynes, many economists have tried to investigate the issue of public debt sustainability. The hereby paper is designed to be an introductory guide in the theory and practice of fiscal sustainability. In this sense, I tried to make a compelling analysis of the evolution of the public debt among the advanced European economies. I have chosen these countries considering that European Union fiscal sustainability is still a much debated and controversial topic and that unsound fiscal policies of individual members could have adverse effects and harm other members’ economies. For the purpose of this study I used annual data, spanned mostly on ...
The Sustainability of Public Finances and Europe's Fiscal
One argument for constraining European fiscal policy under the rules of the Stability and Growth Pact (SGP) is the need to ensure the sustainability of public debt. But has the SGP made a difference in this respect? This paper first provides a new approach to analyzing the concept of debt sustainability under the Maastricht rules and then tests formally whether actual policies have been sustainable in the past and whether the start of monetary union has changed policy behaviors. The result is that the Pact has not changed policy behavior, although European fiscal policies have been sustainable. Furthermore, Monetary union has improved the economic environment within which fiscal policy remains sustainable.
Sustainability of High Public Debt: What the Historical Record Shows
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The paper looks into the debt histories of three European countries, Britain, France, and Germany, to study three questions. First, are there historical parallels to the accumulation of high debt in peacetime that has taken place in the past decades? The answer to this is mostly in the negative. National debt was high during long periods but usually related to wars or their financial aftermath. Second, how were large debts reduced, and that were the factors determining decision-making? Recent research has emphasized the role of social conflict in this context. We find that although this may play a role, the dominant effect may have come from international financial relations. Third, what are the macroeconomic effects of budget stabilization, and does it pay off for a country to repudiate or inflate away its debt? The short-run evidence is mixed, as the success of debt default has varied considerably. In the long run, however, stabilizing the budget pays off, as there seem to be no lasting adverse effects of fiscal austerity on a nation's growth performance.