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Testing the Inter-temporal Budget Constraint for Small States

Jeetendra Khadan and Amrita Deonarine ()
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Amrita Deonarine: Caribbean Economic and Investment Monitor

Economics Bulletin, 2019, vol. 39, issue 2, 1176-1183

Abstract: The issue of fiscal sustainability has emerged as a major challenge for governments in small states due to spillovers of global shocks such as the global financial crisis, commodity price shocks, and the increased occurrence and intensity of natural hazards. Given the weak fiscal situation in small states -relatively high debt to GDP ratios and large fiscal imbalances- this paper follows the inter-temporal budget constraint approach to provide a robust econometric assessment of fiscal sustainability for a panel of 15 small states over the period 1991-2017 using recent advances in panel cointegration. The findings show the existence of cointegration between government revenues and expenditure, but with the magnitude of the long-run coefficient of public expenditure less one indicating that fiscal policy is “weakly†sustainable.

Keywords: Inter-temporal budget constraint; panel cointegration; small states (search for similar items in EconPapers)
JEL-codes: C1 E6 (search for similar items in EconPapers)
Date: 2019-05-15
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