Government solvency: Revisiting some EMU countries

Corsetti and Roubini [Corsetti, G., Roubini, N., 1991. Fiscal deficits, public debt and government solvency: Evidence from OECD countries. Journal of Japanese and International Economies 5, 354–380] reported that the government finances of Greece, Ireland, Italy and the Netherlands (now all EMU countries) did not satisfy the intertemporal budget constraint (IBC). We re-examine this issue by utilizing a new empirical approach and extended data sets. Issues of structural shifts and non-linear fiscal adjustment are tackled. We find that: (i) the fiscal path of these countries went through multiple shifts; (ii) most of these shifts correspond to important policy changes and/or external shocks; (iii) the government finances of all four countries satisfy the IBC across different time horizons; and (iv) fiscal disequilibrium adjusts non-linearly. We also find a clear positive Maastricht effect on the IBC of all countries.