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RESEARCH PRODUCT

The relationship between debt level and fiscal sustainability in organization for economic cooperation and development countries

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In this article we unify the traditional approaches to testing for fiscal sustainability considering the stock-flow system that fiscal variables configure. Our approach encompasses previous ways of testing for sustainability. The results obtained for a group of 17 Organization for Economic Cooperation and Development (OECD) countries point to weak fiscal sustainability, as well as to the existence of cointegration between deficit and debt, confirming the relevance of the stock-flow approach. Allowing for structural breaks and multicointegration turns out to be of critical importance to assess whether the fiscal authorities apply their policies looking for sustainability and whether, simultaneously, they try to stabilize real debt target levels. (JEL H62, E62, C22) The authors gratefully acknowledge the financial support from the MICINN CICYT co-ordinated projects ECO2011- 30260-C03-01 (M.C. and C.T.) and ECO2011-30260-C03-03 (J.L.C.-S.). M.C. and C.T. gratefully acknowledge the financial support under Lifelong Learning Program (Jean Monnet Program) by the European Commission references 542457- LLP-1-2013-1-ES-AJM-CL and 542434-LLP-1-2013-1-ESAJM- CL, respectively. M.C. and C.T. are also members of the Research Group of Excellence on Economic Integration INTECO, funded by Generalitat Valenciana Prometeo action 2009/098.