Does sustainability hypothesis hold in developed countries? A panel co-integration analysis

The present study examines the sustainability hypothesis by examining the co-integration between public revenues and public expenditures for selected 20 developed countries between 1999Q1 and 2011Q4. For this purpose, Hadri panel unit root test have been used to check the stationarity of variables. Bai and Perron multiple structural break point tests have been used to find possible breaks in the data. Pedroni co-integration tests and Westerlund co-integration tests have been used to find long run relationship between public revenues and expenditures after the adjustment of structural breaks in the analysis. Mean group/pooled mean group, fully modified ordinary least squares and dynamic ordinary least squares have been used to find the strength of relationship between said variables and to test the sustainability hypothesis. The result of study finds a unit slope on public expenditures and confirms the sustainability hypothesis for the selected sample. This also verifies the authenticity of present fiscal policy for our selected sample countries.