Riding the Storm: Fiscal Sustainability in the Caribbean

Serhan Cevik and Vibha Nanda

No 2020/021, IMF Working Papers from International Monetary Fund

Abstract: Fiscal sustainability remains a paramount challenge for small economies with high debt and greater vulnerability to climate change. This paper applies the model-based sustainability test for fiscal policy in a panel of 16 Caribbean countries during the period 1980–2018. The results indicate that the coefficient on lagged government debt is positive and statistically significant, implying that fiscal policy in the Caribbean takes corrective actions to counteract an increase in the debt-to-GDP ratio. Nonlinear estimations, however, show that the quadratic debt parameter is negative, which indicates that fiscal policy response is not adequate to ensure sustainability at higher levels of debt. We also find that the fiscal stance tends to be countercyclical on average during the sample period. These empirical results confirm that maintaining prudent fiscal policies and implementing growth-enhancing structural reforms are necessary to build fiscal buffers and ensure debt sustainability with high probability even when negative shocks occur over the long term.

Keywords: WP; potential GDP; government; Debt sustainability; fiscal reaction function; fiscal policy; fiscal solvency; output gap variable; reaction to an increase; debt accumulation; prudent fiscal policies; fiscal policy reaction; interest rate; fiscal policy response; fiscal policy path; sustainability of fiscal policy; expenditure series; expenditure policy; output gap in the Caribbean; Fiscal stance; Fiscal sustainability; Output gap; Caribbean (search for similar items in EconPapers)
Pages: 19
Date: 2020-01-31
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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