The Sustainability of Public Debt in Presence of Fiscal Limits

Student: Kiseleva Ol`ga

Educational Programme: Bachelor

Year of Graduation: 2014

<p>In this paper an empirical testing of European debt sustainability is presented. Namely, the main research question was if an intertemporal budget constraint is satisfied that, in turn, means that debt in EU is sustainable. Facing with fiscal limits, the European governments, in practice, are becoming unable to adhere to a sustainable fiscal path. Indeed, fiscal limits could invalidate the debt sustainability criteria hindering an evaluation of countries' solvency. For these reason, fiscal limits are to be introduced in the framework in order to transform the existing criteria. In regard of the empirical analysis, these touchstones involve three principal stages: testing the stationarity of the main variables, checking the cointegrating relationships and estimation of their parameters. The results of the empirical testing show that intertemporal budget constraint in EU is satisfied and fiscal policies are able to rule out an explosive behavior of debt in absence of extremely strong stochastic shocks.</p>

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