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Applied Economics
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How to assess debt sustainability? Some theory and

empirical evidence for selected euro area countries
a a
Bettina Fincke & Alfred Greiner
a
Department of Business Administration and Economics, Bielefeld University, PO Box
100131, 33501 Bielefeld, Germany
Published online: 27 Jun 2011.

To cite this article: Bettina Fincke & Alfred Greiner (2012): How to assess debt sustainability? Some theory and empirical
evidence for selected euro area countries, Applied Economics, 44:28, 3717-3724

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 Applied Economics, 2012, 44, 3717–3724

How to assess debt sustainability?

Some theory and empirical
evidence for selected euro
area countries
Bettina Fincke and Alfred Greiner*
Department of Business Administration and Economics, Bielefeld University,
PO Box 100131, 33501 Bielefeld, Germany
Downloaded by [Universite De Paris 1] at 02:36 23 June 2013

In this article we elaborate on the test proposed by Bohn (1998) that

suggests to study whether the primary surplus relative to Gross Domestic
Product (GDP) is a positive function of the public debt to GDP ratio in
order to detect whether debt policies are sustainable. We argue that this
should be complemented by additional tests for countries with rising debt
to GDP ratios. We, then, apply that test to some countries of the euro area.
In addition, we perform stationarity tests with respect to the real deficit
inclusive of interest payments in order to gain additional insight. We
conclude that there is empirical evidence that the chosen paths of fiscal
policies are sustainable for the countries we consider, although there are
country specific differences in debt policies.

Keywords: public debt; sustainability; euro area

JEL Classification: E62; H63

I. Introduction to GDP exists. If this relationship is significantly

Public debt has been continuously increasing over the
last 30–40 years in most European countries. The
financial crises that began in 2008 still aggravated the
problem of public indebtedness in industrialized
countries which raise question about the sustainabil-
ity of public debt.
This article analyses sustainability of public debt
for selected European countries. Starting point is the
theoretical model introduced by Bohn1 that allows
one to test if a coherency between the primary surplus
to Gross Domestic Product (GDP) ratio and the debt
positive this indicates evidence for sustainability of
the implemented fiscal policy path. Such a govern-
ment responds with corrective actions, i.e. it raises the
primary surplus relative to GDP as the public debt to
GDP ratio rises. Subsequently this idea is tested for
certain European countries.
Additionally, we argue that performing that test
alone may not be sufficient to answer the question of
whether a given fiscal policy is sustainable. This holds
because a positive reaction coefficient does not
necessarily imply that the debt ratio remains bounded
which, however, must hold asymptotically.

*Corresponding author. E-mail: agreiner@wiwi.uni-bielefeld.de

1
See Bohn (1995, 1998).
Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online ß 2012 Taylor & Francis 3717
http://www.informaworld.com
DOI: 10.1080/00036846.2011.581213
 3718 B. Fincke and A. Greiner
Therefore, we analyse in addition whether the total to be sustainable if the government does not play a
deficit of the government is stationary which is a Ponzi game, i.e. if,
sufficient condition for sustainability of public debt if Rt
 rðrÞd
the interest rate is positive. lim BðtÞe t0 ¼0 ð2Þ
t!1
The countries we consider in our study are Austria,
France, Germany, Italy, the Netherlands and holds.
Portugal. France and Germany are included because Next, assume that the primary surplus relative to
they are the largest economies in the euro area. Italy GDP,4 S/Y, is given by,
 
and Portugal are added because they recently had SðtÞ BðtÞ
financial difficulties as both belong to the so-called ¼ !ðtÞ þ pðtÞ ð3Þ
YðtÞ YðtÞ
PIIGS countries,2 a group of European economies
that suffer from large budget deficits and high debt with (t) 2 IR the coefficient that gives the reaction of
ratios at the moment. Also, Austria is included the primary surplus to public debt relative to GDP
because the evolution of its debt ratio with a sharp and that may be time-varying. The coefficient !(t)2IR
increase during the 1970s and stabilization in the that may also be time-varying captures other influ-
1990s can be seen as characteristic for many euro area ences on the primary surplus, such as the effect of
countries. The Netherlands, finally, have undertaken business cycles for example.
substantial macroeconomic reforms in the mid-1980s From an economic point of view !(t) will be
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to early 1990s and successfully reduced their debt to bounded, i.e. |!|51 such that we can replace !(t) by
GDP ratio. its upper or lower bound denoted by !.  Thus, the
The remainder of this article is organized as follows. evolution of public debt can be written as
Section II briefly describes the theoretical approach B_ ¼ ðrðtÞ  pðtÞÞBðtÞ  !YðtÞ
 ð4Þ
and the background of the test. In Section III the
results of the empirical estimations are presented, Solving
R t Equation 4 and multiplying both sides
where we first analyse how the primary surplus relative  rðuÞd
by e t0 to get present values leads to
to GDP reacts to variations in the debt-GDP ratio
and, then, test whether the deficit inclusive of eC3 ðtÞ BðtÞ ¼ eC1 ðtÞ Bðt0 Þ  !Yðt
 0 ÞeC1 ðtÞ
interest payments is stationary. Section IV, finally, Zt
summarizes the central arguments.  eC1 ðÞ eC2 ðÞ eC3 ðÞ d ð5Þ
t0

where we have set

Z Z
II. The Test Proposed by Bohn ðÞd  C1 ðÞ, ðÞd  C2 ðÞ,
t0 t0
Z ð6Þ
The test proposed by Bohn (1998) suggests to analyse rðÞd  C3 ðÞ
whether the primary surplus relative to GDP is a t0
positive function of public debt relative to GDP, i.e. a with  the growth rate of GDP.
positive function of the debt ratio. The idea behind Given Equation 5 it can be shown (see e.g. Greiner
this test is that such a policy makes the debt to GDP and Fincke, 2009) that a positive reaction coefficient
ratio a mean reverting process. Hence, rising debt on average implies that the government fulfils its
ratios lead to higher primary surplus relative to GDP inter-temporal budget constraint. It should be noted
that exerts a tendency towards mean reversion. that the reaction of the government to the debt ratio
Assuming a deterministic economy, the evolution may be negative for some periods, however, on
of public debt is given by average it must be positive for sustainability.
B_ ¼ rðtÞBðtÞ  SðtÞ ð1Þ However, a positive reaction coefficient does not
guarantee that the debt ratio remains bounded. To
with B(t) public debt, r(t) the interest rate and S(t) see this, we define by b ¼ B/Y the debt to GDP ratio.
the primary surplus that consists of public revenues Using the rule defined in Equation 3 the rate of
less primary expenditures, e.g. without interest change of the debt ratio is easily derived as
payments.3 All variables are real and continuous
_ ¼ ðrðtÞ  ðtÞ  ðtÞÞbðtÞ  !
bðtÞ ð7Þ
functions of time t. A given path of public debt is said
2
That is Portugal, Italy, Ireland, Greece and Spain.
3
The dot gives the derivative with respect to time.
4
In the following we delete the time argument t if no ambiguity arises.
 Debt sustainability: theory and empirical evidence for selected euro area countries
With the constants defined in Equation 6 the solution
of this equation can be written as
bðtÞ ¼ eC1 ðtÞC2 ðtÞþC3 ðtÞ bðt0 Þ  !e C1 ðtÞC2 ðtÞþC3 ðtÞ
Zt
 eC1 ðÞ eC2 ðÞ eC3 ðtÞ d
t0
Proceeding as above, it is readily shown that
the debt R t to GDP ratio R tremains bounded for
limt!1 t0 ðÞd 4 limt!1 t0 ðrðÞ  ðÞÞd. This
implies that the reaction coefficient need not only
be positive but larger than the difference between the
interest rate and the growth rate of GDP for the debt
to GDP ratio to remain bounded.5 Again, with time-
varying coefficients this inequality must hold only on
average.
With these considerations one could conclude that
a rising debt ratio can be compatible with a sustain-
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able policy. This may hold true for a certain time
period, however, in the long run this possibility may
not be given. This is simply due to the fact that the
primary surplus to GDP ratio cannot exceed a certain
value because the primary surplus in a certain time
period is always smaller than GDP. Hence, the
theoretical upper bound for the primary surplus
ratio relative to GDP is one, but the actual bound will
of course be definitely smaller.
Nevertheless, testing the reaction of the primary
surplus to variations in public debt is a powerful test
that yields important information on debt policies of
economies. Therefore, in the following section we
perform that test for some European countries. To
gain additional insight, we then test whether the
deficit inclusive of interest spending is stationary.
III. Empirical Evidence for Euro Area
Countries
The primary surplus and public debt
To apply the test of the previous section we estimate
the following equation with yearly data
sðtÞ ¼ ðtÞbðtÞ þ !T ZðtÞ þ ðtÞ
where s(t) is the primary surplus to GDP ratio and
b(t) the public debt to GDP ratio at time t. Z(t) is a
vector of variables that includes 1 in its first element,
for the intercept, and additional variables in its
5
Recall that in a dynamic efficient economy r4 holds.
6
Initially, to account for indirect influence, we also included the real long-term interest rate. However, for most of the
countries under consideration the estimated coefficient was not statistically significant. Therefore we consistently
implemented the model without it.
7
All equations are estimated with R (Version 2.5.0) with the package mgcv (Version 1.3-23).
3719
other elements. (t) is an error term, which is assumed
to be independent and identically distributed
(i.i.d.) N(0,  2).
The variables included in Z(t) are motivated by the
tax smoothing hypothesis according to which public
ð8Þ
deficits should be used in order to keep tax rates
constant which minimizes the excess burden of
taxation. Hence, normal expenditures should be
financed by regular revenues and deficits should be
incurred to finance unexpected spending. Therefore,
we include a business cycle variable, YVar, that
accounts for fluctuations in revenues. YVar is
obtained by applying the HP filter to the real GDP
series and then computing the deviation of actual
GDP from its trend variable. In addition, we include
the surplus of the social insurance system relative to
GDP, Soc, because governments often subsidize
social security when revenues of social insurances
fall short of expenditures. This can also be interpreted
as an effect of additional public expenditure on the
primary surplus (as YVar relates to a revenue
influence). Expecting for all three explanatory vari-
ables a positive coefficient seems to be plausible for
our reasoning.
Further, for the estimation the lagged debt ratio
b(t  1) is used in order to take account of endogene-
ity. Thus, Equation 9 can be written as6
sðtÞ ¼ !0 þ ðtÞbðt  1Þ þ !1 SocðtÞ þ !2 YVarðtÞ þ tðtÞ
ð10Þ
Since we assume that the primary surplus relative
to GDP reacts to the debt to GDP ratio of the
previous period, possible endogeneity problems of
public debt are avoided. That holds because the
primary surplus of the current period does not affect
public debt of the last period.
In order to estimate time-varying coefficients we
resort to penalized spline estimation (see Appendix B
for a short introduction; a more thorough treatment
can be found in Hastie and Tibshirani, 1999 or
Ruppert et al., 2003).7 It should be noted that the
relation between the primary surplus and public debt,
relative to GDP, may be nonlinear. However,
Granger (2008) has shown that any nonlinear model
ð9Þ
can be approximated by a linear model with time-
varying coefficients and that the approximation is
good. Therefore, estimating a linear model with time-
varying parameters seems to be justified and general
enough.
 3720 B. Fincke and A. Greiner
Table 1. Average reaction coefficients for the selected
countries.
0.7
Coeff. SE (t-stat.)
Austria 0.118 0.065 (1.804)
0.6
Debt ratio (France)

France 0.187 0.045 (4.123)

Germany 0.366 0.105 (3.479)
Italy 0.066 0.035 (1.859)
0.5

The Netherlands 0.058 0.020 (2.983)

Portugal 0.192 0.023 (8.184)
0.4

the exception of that in the Netherlands as shown

in Fig. 2.8
0.3

As pointed out in the theoretical section we are

1970 1980 1990 2000 interested in the average reaction coefficient deter-
Time
mining how the primary surplus reacts to changes in
Fig. 1. Public debt to GDP ratio for France (1971–2008) public debt, relative to GDP, respectively. Table 1
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shows the estimated average reaction coefficient.9

As Table 1 shows the estimated coefficient is
positive and statistically significant at the usual
levels in all cases, although statistical significance
seems to be relatively small for Austria and Italy.
This implies that, according to the previous section,
0.9

all countries have followed sustainable debt policies.

Debt ratio (The Netherlands)

Nevertheless, the debt ratio has increased, except for

the Netherlands, a situation which cannot go on
0.8

indefinitely. Therefore, we next test the total deficit in

all countries for stationarity.
0.7

Stationarity of the deficit inclusive of interest

payments
0.6

Next, we want to get additional insight into the

question of whether debt policies in the euro area
0.5

are sustainable by looking at stationarity properties

1970 1980
Fig. 2. Public debt to GDP ratio for the Netherlands
(1971–2009)
As regards the debt to GDP ratios all ratios are
characterized by a more or less monotonic trend
except that of the Netherlands where the debt ratio
had declined significantly during the 1990s. In Fig. 1
we exemplarily show the debt ratio of France which
clearly shows the rise in the debt to GDP ratio that
can also be observed in the countries we consider with
1990 2000 2010
of the deficit inclusive of interest payments. To
Time
get the real deficit inclusive of interest payments,
we first divide public debt by the GDP deflator,
Bn(t)/P(t) ¼ B(t) and, then, we calculate first differ-
ences of this series, which gives the real budget deficit
or the deficit inclusive of interest payments,
B(t)  B(t  1) ¼ DB(t) ¼ DEF(t).
As proposed by Trehan and Walsh (1991) we check
if the deficit inclusive of interest payments is a
stationary process which is sufficient for the inter-
temporal budget constraint to hold, provided the
time-varying real interest rate is positive on average
which is the case for the euro area countries under
consideration.

8
See OECD (2010) for the data.
9
The complete estimation results are reported in Appendix A (Table A1–A6). Data have been taken from International
Monetary Fund (2010), OECD (2010). Concerning Germany until 1991 data for West Germany are used.
 Debt sustainability: theory and empirical evidence for selected euro area countries 3721
Table 2. Unit root test results for the selected countries which is described for example in Enders (1995) or in
Pfaff (2006).11
Augmented Estimated For the correct estimation the appropriate amount
Dickey–Fuller model type of lags k is to be determined and the suitable model
Austria 5.48*** Trend and Drift, Lags: 1 type for the data needs to be specified. Below, this
France 3.73** Trend and Drift, Lags: 0 process is assigned to the real deficit series and used
Germany 4.90*** Trend and Drift, Lags: 0 to analyse the data for the selected countries. Table 2
Italy 4.59*** Trend and Drift, Lags: 0
shows the results on testing for unit roots with the
The Netherlands 4.95*** Trend and Drift, Lags: 0
Portugal 5.46*** Trend and Drift, Lags: 1 Augmented Dickey–Fuller (ADF) test.12
Concerning the appropriate estimation we first
Note: ** and *** indicate H0 rejected at 5 and 1% levels, checked how many lags are necessary to obtain a
respectively. model that shows no autocorrelation in the residuals.
For the choice of the lag length, the general-to-
specific method13 is used, i.e. the individual model is
One possibility to test for stationarity of a time estimated with a relative high number of lags, that
series is to resort to unit root tests. For our approach is gradually reduced until the t-statistic on the last lag
we resort to the augmented Dickey–Fuller test.10 The is significant. Further, the choice is judged based on
null hypothesis states that a time series contains a the autocorrelation and partial autocorrelation func-
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unit root, whereas the alternative hypothesis indicates
that the series is a stationary process, that is
H0 :  ¼ 0 versus H1 :  5 0
To be sure that the residuals possess the white noise
characteristics, the augmented Dickey–Fuller test
includes lagged endogenous regressor variables to
account for the problem of possible autocorrelation
in the residuals. There are three types of models
specified: Equation 11 without drift and trend,
Equation 12 with only a drift and model (13) with
drift and trend:
X
k
DDEFt ¼ DEFt1 þ j DDEFtj þ t
j¼1
tion of the residuals as well as on the Box–Ljung test
in order to strengthen the decision.
Moreover, staying close to the model type selection
guideline mentioned above, we first of all estimated
all models in the least restrictive way that is inclusive
of a trend and a constant. If the computed test
statistic value is smaller than the  critical value14 it is
sufficient to stop the analysis at this point and accept
H1 that there is no unit root indicating that the
analysed time series is a stationary process.15 This is
possible for all the deficit series inclusive of interest
payments, e.g. for Austria, France, Germany, Italy,
the Netherlands and Portugal, even though the
significance level for France is smaller.
ð11Þ

IV. Conclusion
X
k
DDEFt ¼ 0 þ DEFt1 þ j DDEFtj þ t ð12Þ
j¼1 In this article, we have analysed whether selected
countries of the euro area have followed sustainable
debt policies over the last 30 years. We did this by
X
k
DDEFt ¼ 0 þ DEFt1 þ 2 t þ j DDEFtj þ t analyzing the reaction of the primary surplus to GDP
j¼1 ratio to variations in the debt to GDP ratio which is a
meaningful test. However, we also argued that a
ð13Þ
positive reaction does not guarantee that the debt
The choice of the type of model depends on the data ratio remains bounded which is necessary for a
generating process, which is mostly unknown, sustainable policy in the long run, unless the govern-
but there is a guideline for the model selection, ment becomes a lender. Therefore, we also tested for
10
See for example Enders (1995, p. 221) et seqq.
11
See especially Enders (1995, p. 254–258) and Pfaff (2006, p. 27) et seqq.
12
All tests are performed with the package urca in R (Version 2.5.0). The time period and data sources of the estimations
above retained, except for Portugal: due to data availability only the DEF for 1978–2009 is used. For the critical values see for
example Fuller (1976, Table 8.5.2, p. 373).
13
See for example Enders (1995, p. 226) et seqq. and Pfaff (2006, p. 27).
14
For the critical values see for example Fuller (1976, Table 8.5.2. p. 373).
15
See also Enders (1995, Figure 4.7, p. 257 and Pfaff (2006, Figure 2.3 p. 29).
 3722
stationarity of the public deficit inclusive of interest
payments in order to gain additional insight.
Our results suggest that three different groups can
be distinguished. First, the Netherlands have under-
gone substantial economic reforms in the 1980s that
also stabilized public debt. The Netherlands is the
only country where the debt ratio had declined and
clearly follows a sustainable debt policy. The second
group of countries consists of Germany and Portugal.
Although these countries have experienced rising debt
ratios over the period under consideration both types
of tests suggest that these governments have followed
sustainable policies. Finally, Austria, France and
Italy seem to pursue sustainable debt policies, too.
But for at least one of the two tests the statistical
significance of the estimation results is smaller than
for the countries of the second group.
Downloaded by [Universite De Paris 1] at 02:36 23 June 2013
B. Fincke and A. Greiner
Enders, W. (1995) Applied Econometric Time Series,
Wiley & Sons, New York.
Fuller, W. A. (1976) Introduction to Statistical Time Series,
Wiley & Sons, New York.
Granger, C. W. J. (2008) Non-linear models: where do we
go next – time varying parameter models?, Studies in
Nonlinear Dynamics and Econometrics, 12, Article 1.
Greiner, A. and Fincke, B. (2009) Public Debt and
Economic Growth, Springer-Verlag, Berlin.
Greiner, A. and Kauermann, G. (2008) Debt policy in euro-
area countries: empirical evidence for Germany and
Italy using penalized spline smoothing, Economic
Modelling, 25, 1144–54.
Hastie, T. J. and Tibshirani, R. J. (1999) Generalized
Additive Models, 1st edn (CRC reprint), Chapman and
Hall, Boca Raton, FL.
International Monetary Fund (2010) International
Statistical Yearbook, IMF’s International Financial
Statistics, via StatistikNetz.de, DSI Data Service and
Information.
OECD (2010) OECD economic outlook statistics and
projections and fiscal positions and business cycles

(historical ed.) data, OECD Selection, via

Acknowledgements
We are indebted to two referees for valuable com-
ments that helped to improve this article.
References
Bohn, H. (1995) The sustainability of budget deficits
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Banking, 27, 257–71.
Bohn, H. (1998) The behavior of US public debt
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Semiparametric Regression, Cambridge University
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413–28.

Appendix A: Complete Estimation Results
Here we give the complete estimation results where
we used p-spline estimations. The interpretation is as
usual. The term sm(t) gives the time-varying
component of the reaction coefficient and edf are the
estimated degrees of freedom which give approxi-
mately the number of covariates needed to fit the
function. The higher the edf the stronger the
nonlinearity.

Table A1. Coefficients for Equation 10 for Austria Table A2. Coefficients for Equation 10 for France
(1971–2008) (1971–2008).

Coeff. SE (t-stat.) Pr(4t) Coeff. SE (t-stat.) Pr(4t)

Constant 0.008 0.029 (0.263) 0.794 Constant 0.103 0.020 (5.211) 1.84  105
b(t  1) 0.118 0.065 (1.804) 0.083 b(t  1) 0.187 0.045 (4.123) 0.0003
Soc(t) 2.261 0.687 (3.290) 0.003 Soc(t) 0.683 0.276 (2.480) 0.0198
YVar(t) 0.078 0.108 (0.716) 0.480 YVar(t) 0.336 0.080 (4.211) 0.0003
sm(t) edf 7.314 F 7.775 p-value 1.58  105 sm(t) edf 7.569 F 16.23 p-value 1.24  108
R2(adj): 0.66 DW: 1.85 R2(adj): 0.809 DW 2.07
 Debt sustainability: theory and empirical evidence for selected euro area countries 3723
Table A3. Coefficients for Equation 10 for Germany r-project.org/. We exemplify the fit with the simpli-
(1971–2009) fied model (see also Greiner and Kauermann, 2008)

Coeff. SE (t-stat.) Pr(4t) st ¼ !0 þ t bt1 þ "t

Constant 0.136 0.038 (3.566) 0.001 Let st and bt1 be the observed values for
b(t  1) 0.366 0.105 (3.479) 0.002
Soc(t) 1.156 0.525 (2.203) 0.036 t ¼ 2, 3, . . . . For fitting we replace the functional
YVar(t) 0.254 0.130 (1.949) 0.061 shape t by the parametric form
sm(t) edf 6.818 F 4.407 p-value 0.0012 t ¼ 00 þ 01 t þ ZðtÞ ð14Þ
R2(adj): 0.53 DW: 2.38
where Z(t) is a high-dimensional basis in t. A typical
setting is to choose Z(t) as cubic spline basis functions
allocated at the observed time points t ¼ 2, 3, . . . .
Table A4. Coefficients for Equation 10 for Italy However, numerically more efficient is to work with a
(1972–2009) reduced basis as suggested in O’Sullivan (1986) or
Wood (2000). The latter proposal is implemented in
Coeff. SE (t-stat.) Pr(4t) R. The idea is to construct only those basis functions
Constant 0.071 0.035 (2.015) 0.054 corresponding to the largest eigenvalues of Z(t)Z(t)T
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b(t  1) 0.066 0.035 (1.859) 0.074 (see Wood, 2000 for more details).
Soc(t) 0.774 0.412 (1.879) 0.071 In principle, with replacement (14) one ends up
YVar(t) 0.138 0.118 (1.167) 0.253
with a parametric model. However, fitting the model
sm(t) edf 6.196 F 5.975 p-value 0.00012
in a standard Ordinary Least Squares (OLS) fashion
R2(adj): 0.93 DW: 1.68
is unsatisfactory due to the large dimensionality of
Z(t) which will lead to highly variable estimates. This
can be avoided by imposing an additional penalty
Table A5. Estimation results for the Netherlands term on , shrinking its values to zero. To be more
(1971–2009) specific, we obtain an estimate by minimizing the
penalized OLS criterion
Coeff. SE (t-stat.) Pr(4t) X
fst  dt d  Zðdt Þg2 þ  T P
Constant 0.048 0.014 (3.314) 0.002 t
b(t  1) 0.058 0.020 (2.983) 0.005
Soc(t) 0.657 0.185 (3.553) 0.001 with called the smoothing or penalty parameter and
YVar(t) 0.523 0.125 (4.170) 0.0002  TP as penalty. Matrix P is thereby chosen in
sm(t) edf 1.68 F 1.722 p-value 0.168 accordance to the basis and for cubic splines the
R2(adj): 0.53 DW: 1.94 penalty corresponds to the integrated square deriva-
tive of t (see also Ruppert et al., 2003, for more
details). It is easy to see that choosing ¼ 0 yields an
unpenalized OLS fit, while ! 1 typically implies
Table A6. Estimation results for Portugal (1977–2009).  ¼ 0 depending on the choice of P. Hence, steers
the amount of smoothness of the function with a
Coeff. SE (t-stat.) Pr(4t) simple linear fit as one extreme and a high-dimen-
sional parametric fit as the other extreme.
Constant 0.105 0.013 (8.343) 4.46  109
b(t  1) 0.192 0.023 (8.184) 6.58  109 Let q ¼ (1 , 2 , . . .)T be the time-varying effect
Soc(t) 1.006 0.336 (2.990) 0.006 stacked up to a column vector and assume for
YVar(t) 0.101 0.069 (1.470) 0.153 simplicity of presentation that !0 ¼ 0. Let t be the
sm(t) edf 1 F 6.717 p-value 0.015 vector of observed points in time and Z(t) the spline
R2(adj): 0.68 DW: 2.03 basis evaluated at these points. With the
spline approximation we set q ¼ B(t)h where
^
B(t) ¼ (1, t, Z(t)) and h ¼ (00, 01, c). The estimate q,
Appendix B: Nonparametric Estimation say, is then available in analytic form via q^ ¼ H( )s,
with s ¼ (s1, s2, . . . )T and H( ) as hat or smoothing
The subsequent algorithm is based on Wood (2000) matrix, respectively, defined through
and implemented in the public domain software   1
package R. The program and more information T 0 0
Hð Þ ¼ BðtÞ B ðtÞBðtÞ þ BT ðtÞ
about it can be downloaded from http://www. 0 P
 3724
Note that H(0) and H(1) are classical hat matrices
while H( ) for 05 51 is a penalized version. The
trace of H( ) is usually understood as the degree
of the fit where 2 ¼ tr(H(1))  tr(H( )) 
tr(H(0)) ¼ p þ 2 with p as dimension of Z(t). The
linear operator also allows to easily calculate vari-
ances of the estimate via
X with n as overall sample size. A suitable choice for is
^ ¼ Hð Þ
VarðqÞ ðsÞHT ð Þ
with (s) as covariance matrix of s. Assuming
uncorrelated and homoscedastic residuals we get
^ ¼ ^ 2 H( )HT(X) with ^ 2 as residual variance
Var(q)
estimate. Finally, if additional covariates are in the
model, like in (10), we pursue the same estimation like
above but with hat matrix H( ) being supplemented
by the additional covariate vectors.
Downloaded by [Universite De Paris 1] at 02:36 23 June 2013
B. Fincke and A. Greiner
To obtain a reliable fit, should be chosen data
driven. One possibility is to use a Generalized Cross
Validation (GCV) criterion defined through
X st  !0  ^ t bt1 2
GCVð Þ ¼
t
1  trðHÞ=n
achieved by minimizing GCV( ).
This can be done iteratively using a Newton–
Raphson algorithm, as has been pointed out and
implemented by Wood (2000). In principle there are
numerous other routines to select , like an Akaike
information criterion or cross-validation. The GCV
however has proven to be numerically quite stable
and is therefore the default choice used in the
implemented version in R.