Hidden Fiscal Unsustainability: Evidence from Real-Time Data in the Euro Area

Abstract

Abstract This study examines the implications of data revisions for the assessment of fiscal sustainability in the Euro area. Using vintage datasets from the OECD Economic Outlook , we define ex ante data as the latest available estimates at each point in time and ex post data as the final revised values. To capture heterogeneous fiscal behaviors between Greece and other Euro area countries, we develop a novel approach, panel regression kink model with heterogeneous unknown thresholds. This study yields three main findings. First, it provides the first evidence of substantial differences in estimated fiscal responses between ex ante and ex post data for Greece, consistent with the fiscal sustainability criteria, thereby revealing “hidden fiscal unsustainability.” Second, recursive estimates based on real-time vintage data indicate that the weakening of Greece’s estimated fiscal response reflects both revisions to pre-EMU data and the addition of post-EMU observations. Third, in the Euro area as a whole, excluding Greece, fiscal discipline tends to emerge when the public debt exceeds levels ranging from 60 to 70 percent of the GDP. This study contributes to the ongoing debate on the reform of the European fiscal framework towards the assessment of fiscal sustainability.