Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries*

Georgios Chortareas, George Kapetanios and Merih Uctum

Oxford Bulletin of Economics and Statistics, 2008, vol. 70, issue 5, 645-663

Abstract: We analyse the sustainability of government debt for Latin American and Caribbean countries employing unit‐root tests with nonlinear alternative hypotheses and examine the robustness of our results against those from unit‐root tests with breaks and threshold nonlinearities. We show that, in general support for sustainability substantially improves when nonlinear mean reversion is taken into account. We also find that the results obtained from applying various tests with nonlinear alternatives, although broadly consistent, are not identical. This suggests that reliance on a single unit‐root test for assessing fiscal policy sustainability may be misleading.

Date: 2008
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