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Assessing Fiscal-Policy Sustainability: On the Different States of the Debt-to-GDP Process

Author

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  • Anton Velinov

Abstract

This paper assesses fiscal-policy sustainability. A sufficient condition for this is that public debt is on a stationary trajectory. This is tested by means of a very general Markov-switching augmented Dickey-Fuller (MS-ADF) model, which expands and improves simpler existing models of this type, and produces more reliable results than conventional state-invariant unit-root tests. Long data series (in some cases with more than 200 observations) on the debt-to-GDP ratio are analyzed for 16 countries. Empirical results indicate that Finland, Norway, Sweden, Switzerland, and the UK have sustainable fiscal policies. Greece and Japan have unsustainable fiscal policies, which could lead to debt default unless appropriate measures are taken. The remaining countries are characterized as having uncertain debt policies, which governments could take as a warning to try to better balance their budgets. The results are found to be robust to variations in the specific time period investigated and the number of states used.

Suggested Citation

  • Anton Velinov, 2015. "Assessing Fiscal-Policy Sustainability: On the Different States of the Debt-to-GDP Process," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(4), pages 415-439, December.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201512)71:4_415:afsotd_2.0.tx_2-i
    DOI: 10.1628/001522108X14385891669733
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    Cited by:

    1. Meier, Samira & Rodriguez Gonzalez, Miguel & Kunze, Frederik, 2021. "The global financial crisis, the EMU sovereign debt crisis and international financial regulation: lessons from a systematic literature review," International Review of Law and Economics, Elsevier, vol. 65(C).

    More about this item

    Keywords

    Markov switching; debt trajectory; fiscal-policy sustainability; unit-root testing;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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