Debt Sustainability in Selected Euro Area Countries: Empirical Evidence Estimating Time-Varying Parameters

Testing for sustainability of public debt by analyzing how the primary surplus reacts to variations in debt, as suggested by Bohn (1998), has received great attention in economics literature. In this contribution, we apply that test to some countries of the euro area, including the PIIGS countries, where we allow for a time-varying reaction coefficient. We conclude that most economies are characterized by sustainable debt policies with the exception of Greece and possibly Italy. While Greece has clearly pursued an unsustainable debt policy, no clear-cut result can be obtained for Italy. For the latter country, the outcome crucially depends on the time period under consideration.