Testing for public debt sustainability using band spectrum regression analysis "

Abstract

In this note we focus on the response of the primary surplus to debt (ratios to GDP)over a low frequency band (associated with cycles with period between eight and sixteen years) to filter out business cycle effects. For this purpose, we use band spectrum regression, using both the Fourier Transform and the Discrete Wavelet transform, fitted to pooled panel dataset of 18 EMU countries. The empirical findings give evidence of fiscal fatigue within Eurozone:the response of primary surplus to debt will decrease over a finite debt limit.