Testing the fiscal theory of the price level for European countries: a cointegrated VAR approach"

The paper analyses the fiscal theory of price level in a number of European countries applying the methodology devised by Canzoneri et al. (2oo1). Our investigation highlights the absence of a common behavior shared across European fiscal authorities. From the results of the VAR estimates we learn that too expansionary fiscal stances are not the sole threat to sound public budgets. Fiscal sustainability is also endangered by the worsening of the deficit / GDP ratio, after a rise in interest payments and/or a slowdown in the GDP growth rate.