Fiscal Consolidation and Debt Sustainability in Latin America and the Caribbean: Evidence from a Panel Threshold Logit Model

Ameni Mtibaa () and Foued Badr Gabsi ()
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Ameni Mtibaa: LEO, CNRS, University of Orléans
Foued Badr Gabsi: University of Sfax

Journal of the Knowledge Economy, 2025, vol. 16, issue 5, No 46, 16870-16900

Abstract: Abstract The growing level of public debt in Latin American and Caribbean (LAC) countries has raised awareness of debt sustainability and fiscal consolidation issues. This study deals with fiscal sustainability by estimating fiscal reaction function (FRF) for a panel of 9 LAC countries from 2000 to 2016. We rely on the standard logistic regression model as well as the Panel Threshold Logit Model (PTLM) which allows testing the nonlinearity using a binary dependent variable. We draw upon the newly constructed narrative dataset provided by David and Leigh (2018) to measure fiscal consolidations. Results show that public debt has been sustainable based on the linear model. We also find robust evidence that successful fiscal adjustments are more likely to occur in times of public debt increase. This reveals that debt management policies were effective in supporting economic recovery across countries. However, fiscal behavior has been unsustainable when considering the nonlinear model, specifically, beyond the debt threshold level. This evidence of fiscal fatigue calls for prudent fiscal policies allowing the diversification of funding sources for LAC budgets to improve the primary fiscal balance.

Keywords: Fiscal policy; Fiscal consolidation; Narrative approach; Threshold Regression Models; Logit models (search for similar items in EconPapers)
JEL-codes: C24 E62 H62 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s13132-024-02528-1

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