Greek Budget Deficits, Structural Breaks and the Concept of Sustainability : New Econometric Evidence

This paper attempts to investigate the concept of the sustainability of Greek fiscal policy. Several procedures to test such sustainability have been proposed in the relevant literature, which focuses on the univariate properties of the public deficit and on the presence of a long-run relationship between government spending and revenues. Our empirical analysis uses an approach proposed by Martin (2000) and is based on a cointegration model allowing for multiple endogenous breaks in both the intercept and slope parameters. The methodology produces an inference about the value of the cointegrating parameters, as well as the size and the timing of shifts in the relationship. Practical advantages arising from the estimation of models with structural changes are, among others, the identification of events that may have fostered the structural changes and better forecasts when the most recent regime is used. The results reveal that the Greek public deficit is sustainable, in the weak sense of the term. The above findings imply possible future problems and call for fiscal reforms