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Public Debt, the Unit Root Hypothesis and Structural Breaks: A Multi‐Country Analysis

Merih Uctum (), Thom Thurston and Remzi Uctum ()

Economica, 2006, vol. 73, issue 289, 129-156

Abstract: We assess fiscal performances in G7 and selected Latin American and Asian countries. We consider two questions: (i) Have public finances been sustainable? (ii) Do countries follow more restrictive fiscal policies when debt starts to rise? We find that: (i) the traditional unit root tests often overlook the corrective actions taken by many governments; controlling for structural breaks changes the non‐stationarity results dramatically among the three groups; (ii) estimation of a reaction function for governments, expanded by incorporating structural breaks, provides further evidence for significant active anti‐debt policies among G7 countries, and to a lesser extent in the other regions.

Date: 2006
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Handle: RePEc:bla:econom:v:73:y:2006:i:289:p:129-156