Fiscal Sustainability in Emerging Markets: Panel Unit Root Approach with Smooth Structural Shifts and Common Factors

Ersin Yavuz, Emre Kılıç and Nedim Mercan

Journal of Research in Economics, Politics & Finance, 2025, vol. 10, issue 3, 1173-1190

Abstract: We test the fiscal sustainability in emerging markets (EMs) for a period of nearly half a century (1970-2022) using the panel unit root approach with common factors and Fourier breaks through the government budget balance. We also provide an opportunity for comparison by applying a method that considers sharp-type breaks under common factors. The outcomes of the sharp-type break test report that the budget structure in EMs is unsustainable at both the panel and cross-sectional levels. On the contrary, evidence from the Fourier break test confirms fiscal sustainability at the panel level and for six countries (Indonesia, Peru, the Philippines, South Africa, Thailand, and Türkiye). The paper advocates that in samples such as EMs with many breaks, sharp-break approaches are inadequate to explain the data structure. These differing analysis findings highlight that Fourier break approaches are strong candidates to fill this gap in the empirical literature. Lastly, the paper offers policy recommendations based on the findings generated by the new approach.

Keywords: Fiscal Sustainability; Emerging Markets; Fourier Shifts; Common Factors; Panel Unit Root (search for similar items in EconPapers)
JEL-codes: C23 E62 H61 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ahs:journl:v:10:y:2025:i:3:p:1173-1190

DOI: 10.30784/epfad.1747292

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