ANALYZING THE SUSTAINABILITY OF SWEDISH FISCAL POLICY : Johansen cointegration approach

• Main Author: Knutsson, Anton
• Format: Others
• Language: English
• Published: Umeå universitet, Nationalekonomi 2021
• Subjects: Economics; Nationalekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-184533

Fiscal policy in Sweden has varied heavily over the last 50 years, from being a distributive tool during most of the 20th century to strongly focusing on stabilization policies in the 1980s and 90s. This study examines the sustainability of Swedish fiscal policy in terms of public debt between 1800 and 2019 using data from Mauro et al. (2013). When testing for fiscal sustainability, three approaches are used; the Engle-Granger cointegration test, the Johansen (1992) cointegration testing procedure, and the Gregory, Hansen (1996a, b) cointegration test approach. The Johansen (1992) cointegration procedure finds a long-run cointegrating relationship between public debt, revenue, and expenditure, providing evidence of fiscal sustainability. The Gregory, Hansen (1996a, b) approach also finds evidence of fiscal sustainability, using one structural break. The Engle-Granger cointegration test finds no evidence of fiscal sustainability when including public debt in the model. All tests find cointegration between revenue and expenditure, suggesting that fiscal policy is sustainable overwhelmingly when not accounting for public debt levels.