Fiscal policy in Sweden: Effects of EMU criteria convergence

This paper investigates the sustainability of Swedish fiscal policy performed during the period 1963-2000. The main emphasis is on assessing the effects of changes in fiscal policy, such as changes in taxes or public spending. On the basis of Johansen's VAR and the augmented Granger causality tests, the results show that taxes and spending are causally related in the long-run and the homogeneity condition is supported empirically. The effect of EMU criteria convergence on fiscal policy is also investigated empirically. The 'Pantula principle' is applied to determine the form of deterministic trend component. Special attention is given to the lag-choosing process. The policy implication of our findings is that Sweden is not in violation of its intertemporal budget constraint.