Is Fiscal Policy Sustainable in Developing Economies?

Subrata Ghatak and José Sánchez-Fung

No 384, Discussion Papers from VATT Institute for Economic Research

Abstract: This paper investigates fiscal policy sustainability in Peru, the Philippines, South Africa, Thailand, and Venezuela using competing methodologies. Standard unit roots and cointegration analyses do not endorse the validity of the intertemporal budget constraint. In contrast, to varying degree across-countries, alternative testing employing a fiscal policy reaction function indicates sustainability defined as surplus adjustments in response to higher debt to income ratios. Corresponding debt-dynamics analyses show that corrective measures were put in place to revert non-sustainable trends in government debt. However, ancillary variables in the debt modeling produce statistically weak evidence of procyclical fiscal behavior in the Latin American countries.

Keywords: Fiscal policy sustainability; fiscal policy reaction functions; developing countries; Macroeconomic policy; Talouspolitiikka; International comparisons; Kansainväliset vertailut; Taxation; Verotus; Policy analysis and modelling; Päätöksenteon tuki ja mallintaminen (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-afr, nep-mac, nep-pbe and nep-sea
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Citations: View citations in EconPapers (3)

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Journal Article: Is Fiscal Policy Sustainable in Developing Economies? (2007)
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