Debt threshold for fiscal sustainability assessment in emerging economies

Ngan Tran

Journal of Policy Modeling, 2018, vol. 40, issue 2, 375-394

Abstract: This paper explores the debt threshold for fiscal sustainability assessment for 14 emerging economies during the period 1999–2016. The threshold point is identified as the level which, if exceeded, promptly raises sovereign risk to an unsustainable level. As such, we employ a panel threshold analysis to the determination of debt limit, which can serve as a distinctive feature from other studies on fiscal sustainability. Our results demonstrate that non-Latin American economies are considered to be sustainable in the short run, as their debts remain below the threshold bounds of 40–55% of GDP. However, the long-run sustainability risk may emerge from a continuous upward trend in debt paths, implying the need for rebuilding fiscal buffers. It is important to emphasize that fiscal sustainability is far more challenging for most Latin-American economies. This is indicated by their debt accumulation beyond the threshold level of roughly 35% of GDP which is relatively lower than that estimated for the other countries. Indeed, during times of high debt, emerging countries in Latin America also face higher default risk since their sovereign risk premium respond more strongly to debt rise. Their paths toward fiscal sustainability, hence, requires an immediate imposition of strict fiscal discipline to relieve the debt pressure.

Keywords: Fiscal sustainability; Government debt; Sovereign risk premium; Panel threshold regression models (search for similar items in EconPapers)
JEL-codes: C24 H63 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0161893818300176
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:40:y:2018:i:2:p:375-394

DOI: 10.1016/j.jpolmod.2018.01.011

Access Statistics for this article

Journal of Policy Modeling is currently edited by A. M. Costa

More articles in Journal of Policy Modeling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().