Measuring fiscal policy sustainability in developing Asia: what does the Markov Switching Augmented Dickey-Fuller Test tell us?

Dannah Ysabel M. Premacio, Ezra Rebecca G. Vidar and Toby C. Monsod
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Dannah Ysabel M. Premacio: University of the Philippines
Ezra Rebecca G. Vidar: University of the Philippines
Toby C. Monsod: University of the Philippines

Philippine Review of Economics, 2023, vol. 60, issue 2, 81-103

Abstract: This paper measures fiscal sustainability in 22 developing Asian countries for the period 1999–2017. Previous literature generates conflicting results: one paper applies the usual stationarity and cointegration tests and finds that fiscal policy is sustainable but in weak form. Another paper employs a fiscal reaction function and finds that fiscal policy is unsustainable. This paper uses an expanded version of the Markov Switching Augmented Dickey-Fuller test (MS-ADF), which remedies the shortcomings of conventional stationarity tests to provide more statistical power in the presence of nonlinearities and structural breaks. The MS-ADF has never been applied to this set of countries. Results show that the majority of the countries have “uncertain†debt trajectories, not definitively sustainable or unsustainable but somewhere in-between. This is a more nuanced picture of the debt trajectories in the region relative to what is obtained using the established methods. A more nuanced assessment could lead to more suitable policy corrections.

Keywords: fiscal policy sustainability; public debt; stationarity test; Markov Switching-ADF (search for similar items in EconPapers)
JEL-codes: C22 H63 (search for similar items in EconPapers)
Date: 2023
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