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variables with the international gap as the instrument for the contemporaneous gap,
column sixth) gives debt reactions which are equal to those in the second column of Table
2.4 when divided by (1-
ρ).

Columns 7 to 12 deal with possible specification bias linked to non-linearities and
structural breaks in the response to debt. Only Greece, Ireland and Denmark (and the US)
appear sensitive to the inclusion of the square of the deviation of the debt with respect to
its sample average (column DEBT2). The consideration of dummies that take value 1
from 1993 onwards (DUM93), from 1996 (DUM96) or from 2001 (DUM01),
individually or combined, has significant effects on the estimates of the reaction to debt in
several countries, with interesting implications about the effects on fiscal behaviour of
economic integration in the EU. This seems to be the case in at least Germany, Greece,
Spain, Ireland, Austria and Finland. As shown below, in most euro area countries, the
introduction of structural breaks leads to an increase of the reaction to debt after 1993
and/or 1996, while in some cases the response falls after 2001. Also, the consideration of
structural breaks has significant impacts in the US and Japan. More detailed estimation
results for models with structural breaks are provided below.

To assess the impact of the large and relatively omnipresent and persistent SFAs showed
in section 2.3, the baseline model has been re-estimated by including a sort of ‘gross
primary surplus’ obtained by subtracting the SFAs, calculated for each year in the debt
accounting exercise (see Table 2.2) to the recorded primary surplus. The result is the
primary surplus that would have been compiled if positive SFAs had been considered as
primary expenditures, while negative SFAs had been accounted as revenues. The results
of re-estimating (2.10) with this gross primary balance is presented in Table 2.5 in the
rows labelled GPSUR.

36



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