Policy regime changes and the long-run sustainability of fiscal policy: an application to Greece

This paper questions the widespread practice of assessing the hypothesis of long-run fiscal policy sustainability by means of conventional unit-root tests that do not allow for the possible impact of regime shifts. Using the Greek economy as a model case, the Zivot-Andrews sequential integratibility testing procedure which allows for the endogenous determination of possible regime changes is deployed to this end. The empirical evidence reached supports strongly the failure of the Greek government to satisfy intertemporal budget balance in the long-run and identifies as the cause of this failure a deterministic policy regime shift taking place in 1979.