Implications of Private Sector Behavior on Public Finance Sector

This paper investigates empirically the effect of private sector behavior on public finance sector for a sample of Central and Eastern European countries over the 2000-2011 period. Among the measures of private sector behavior we used the current account balance adjusted with the government balance, the financial account balance of the balance of payments, the final consumption expenditure of households and the evolution of the real economy. We find strong empirical evidence for the hypothesis that imbalances built up in the private sector would eventually spill over to the public sector under the form of government deficit and increased public debt. In the context of European integration we conclude that the Stability and Growth Pact and the Maastricht convergence criteria would need to account for this relationship when determining critical threshold values for the macroeconomic variables.