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Fiscal sustainability in an emerging market economy: When does public debt turn bad?

Ahmad Zubaidi Baharumshah (), Siew-Voon Soon () and Evan Lau ()

Journal of Policy Modeling, 2017, vol. 39, issue 1, 99-113

Abstract: This paper proposes a Markov-switching model to assess the sustainability of fiscal policy in Malaysia for the period 1980–2014. Our results indicate the policymakers in the past have followed a sustainable fiscal policy, except during the brief periods of economic difficulty. The empirical analysis reveals that the government should cut the deficits only if they exceed a certain level, to ensure their sustainability in the long-run. Specifically, we find that after public debt exceeds a certain threshold level (above 55% of the gross domestic product), it is negatively correlated with economic activity. In addition to the threshold effect, we confirm the presence of a unidirectional causal relation between debt and growth.

Keywords: Endogenous multiple breaks; Fiscal sustainability; Debt; Economic growth (search for similar items in EconPapers)
JEL-codes: E62 F34 H63 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jpolmo:v:39:y:2017:i:1:p:99-113