The goal of this study is to investigate debt sustainability in ten Central and East European countries over the period 1998–2015. We calculate the stabilized debt ratios, turning points, and debt limits using estimates of a fiscal reaction function in its cubic form. We use a balanced panel with fixed effects. We find that in 2017, the public debt exceeded the stabilized debt ratio in all the countries examined. However, the public debt is stable and is below the turning point. Moreover, governments are still far from the debt thresholds of “fiscal fatigue.”

Following the financial crisis of 2007 and the sovereign debt crisis in 2010 that affected the soundness and reduced the strength of public finance in European countries, there has been a growing interest in developing methodologies to the help assess and signal the vulnerability of fiscal policy. Therefore, the aim of this study is to develop a new framework (V-L-D) to assess fiscal vulnerability. V-L-D represents a new methodology on the measurement of fiscal vulnerability that relies on the assumption that vulnerability can occur even during calm times. In comparison with previous methodologies that studied fiscal vulnerability around crisis and fiscal distress times, our framework investigates fiscal vulnerability near fiscal adjustments episodes. Our methodology relies on two distinct indicators: one showing the vulnerabilities indicated by the level of the cyclically adjusted budget balance and distance-to-stability, and one showing the vulnerabilities pointed out through the changes of the cyclically adjusted budget balance and public debt. V-L-D is able to classify fiscal vulnerability into five distinct categories having scores from 0 (no fiscal vulnerability) to 4 (extreme fiscal vulnerability). Using annual data ranging over 1990–2013 for 28 European Union countries, we evidenced 310 episodes of fiscal vulnerability, out of which 128 episodes of low vulnerability, 94 of moderate, 62 of strong, and 26 of extreme fiscal vulnerability. We also found that over 2004–2013, Greece, Portugal, Romania, United Kingdom, Ireland, Spain, and Slovenia were the most fiscally vulnerable countries in the Union. United Kingdom and Greece went through the longest episodes of fiscal vulnerability, counting 12 and 11 consecutive years, respectively. We tested our framework’s effectiveness against the Excessive Deficit Procedure. We found that the overall performance is good: V-L-D assessed moderate fiscal vulnerability during the procedure, strong fiscal vulnerability in the first year when procedure was initiated, and extreme vulnerability one year before the initiation.

In this paper, using a panel of annual observations ranging from 2005 to 2018, we employ the novel unconditional quantile regression by resorting to an augmented fiscal reaction function model to examine the distribution-varying fiscal response for 26 European Union countries. The results point to significant asymmetries regarding the fiscal response measured in terms of the cyclically adjusted primary balance to different covariates. More specifically, we report a U-shaped fiscal reaction to debt changes suggesting more explicit debt stabilization concerns during high-deficit periods. We also show a varying response when debt exceeds the 60% threshold, which is conditioned by the size of the fiscal position. In addition, we reveal a procyclical fiscal behaviour when balance is highly deteriorated.

The aim of this paper is to study the sources of fiscal vulnerability in the European Union countries. For this purpose, we employ an ordered logistic regression with random effects for a balanced panel comprising of 20 countries using a dataset ranged from 2000 to 2012. The results show that higher overall taxation and especially non-distortionary taxes decrease the probability of fiscal policy to be vulnerable. Total government expenditures, as well as productive an unproductive expenditures contribute to an increase in fiscal vulnerability. Discretionary tight fiscal policy reduces it. Fiscal rule are more efficient in lowering vulnerability when unproductive expenditures are included in the model. Fostering economic growth mitigates the risk of one country to become vulnerable, while large financial sector contributes to the increase in fiscal vulnerability. Government effectiveness lowers vulnerability of fiscal policy. Additionally, we found that Central and Eastern European countries are m...