A Model to Simulate the Dynamics of Public Debt Sustainability in EU

Open access

Abstract

Last decades the public debt increased continuously in all countries of European Union. At present, in many countries this dangerous growth is seriously affecting the general process of economic development. Although in a number of countries the public debt is today larger than 60% of GDP, as the imposed limit by Maastricht Treaty, the problem of its sustainability is varying from country to country. Following old and recent published studies in matter of public debt sustainability, one objective of our study is to analyse the existence of a convergence or a divergence process both at the level of the whole EU and within the two major groups of countries (EU14 – old members of EU, after Brexit, and respectively EU11 – new eastern members adhered to EU after 2000). Other objective is to build a model to simulate the long term dynamics of the public debt as a function of standard variables (such as GDP growth, interest rate, budgetary deficit, etc.). Moreover, by using recent data from Eurostat, IMF, and World Bank, we try to estimate few essential parameters in order to control the public debt sustainability in each country of EU. Finally, countries are grouped in a number of classes for which certain policy measures could be evaluated.

References

  • Albu, L.-L. (2002): “Sustainability Function”, Romanian Jornal for Economic Forecasting, 2, 5-14.

  • Albu, L.-L. (2008): “A Simulation model of public debt sustainability, MPRA Paper 11713, University Library of Munich, Germany.

  • Barro, R. (1988): “The Ricardian Approach to Budget Deficits”, NBER, Working Paper, no. 2685.

  • Blanchard, O. J. (1990): “Suggestion for a New Set of Fiscal Indicators”, OECD Working Paper, 79.

  • Coricelli, F. (1997): “Fiscal Policy a Long Term View”, Economic Policy Initiative, 3, Forum Report of the Economic Policy Initiative.

  • Elmendorf, D.W. and Mankiw, G. (1998): “Government Debt”, Handbook of Macroeconomics, January.

  • Dornbusch, R. (1987): Debts and Deficits, Leuven and MIT University Press.

  • Fry, M. (1992): “Some Stabilizing and Destabilizing Effects of Foreign Debt Accumulation in Developing Countries”, Economics Letters, 39, 315-321.

  • Garcia, F. (1998): “Public Debt Sustainability and Demand for Monetary Base”, Working Papers IMF.

  • Krejdl, A. (2006): “Fiscal Sustainability – Definition, Indicators and Assessment of Czech Public Finance Sustainability”, CNB Working Paper Series, 3, Czech National Bank.

  • Langenus, G. (2006): “Fiscal Sustainability Indicators and Policy Design in the Face of Ageing”, NBB Working Papers - Research Series, 102, National Bank of Belgium.

  • Mello, L. and Hussein, K. (2001): “Is Foreign Debt Portfolio Management Efficient in Emerging Economies?”, August, Working Paper, IMF.

  • Monokroussos, P. (2010): “Assessing fiscal policy with the use of sustainability indicators: The case of Greece”, Economy and Markets, Vol. V, Issue VI, December, Eurobank EFG Economic Research.

  • Mundell, R.A. (1990): “Debts and Deficits in Alternative Macroeconomic Models”, Revista di Politica Economica, VII-VIII, 5-130.

  • Rocha, R.R. and Saldanha, F. (1992): “Fiscal and Quasi Fiscal Deficits, Nominal and Real Measurement and Policy Issues”, Working Paper, WPS.

  • Roubini, N. and Sachs, J. (1989): “Government spending and budget deficits in the industrial countries”, Economic Policy, April.

  • Stournaras, Y. (1990): “Public Sector Debt and Deficits in Greece”, Revista di Politica Economica, VII-VIII, 405-440.

  • *** European Commission (2006): “The long-term sustainability of public finances in the European Union”, European Economy, 4, Brussels.