Too Much Debt and Budget Deficit on Fiscal Sustainability: Do Institutions Matter?

Malik Cahyadin (), Tamat Sarmidi (), Norlin Khalid () and Siong Hook Law
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Malik Cahyadin: School of Economics, Universiti Kebangsaan Malaysia and Department of Economics, Universitas Sebelas Maret, Surakarta, Indonesia
Tamat Sarmidi: School of Economics, Universiti Kebangsaan Malaysia
Norlin Khalid: School of Economics, Universiti Kebangsaan Malaysia

Malaysian Journal of Economic Studies, 2022, vol. 59, issue 2, 261-284

Abstract: The current study estimates threshold levels of the public debt-to-gross domestic product (GDP) ratio and the budget deficit for 106 developing and 36 developed countries from 1996 to 2018. A PCA-based fiscal sustainability indicator is also constructed and a dynamic panel threshold regression is employed. The main findings reveal a threshold effect in the public debt-to-GDP ratio and budget deficit-fiscal sustainability nexus. The public debt-to-GDP ratio and budget deficit are beneficial in maintaining fiscal sustainability at lower or upper threshold levels in different institutional indicators. The highest threshold level of the public debt-to-GDP ratio was 59.56% for developed countries and 64.87% for developing countries. The highest threshold level of budget deficit-to-GDP ratio was 0.41% for developed countries and 3.34% for developing countries. Three institutional indicators contribute significantly to the threshold estimation: regulatory quality, the rule of law and control of corruption. Policymakers are advised to maintain certain threshold points to ensure a fiscally sustainable level. The quality of law enforcement and control of corruption should also be improved.

Keywords: Fiscal sustainability indicator; public debt; budget deficit; institutions; dynamic panel threshold (search for similar items in EconPapers)
JEL-codes: E02 E26 E62 H62 H63 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:mjr:journl:v:59:y:2022:i:2:p:261-284

DOI: 10.22452/MJES.vol59no2.5

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