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Fiscal sustainability in India: evidence from Markov switching and threshold regression models

Author

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  • Vaseem Akram
  • Badri Narayan Rath

Abstract

Purpose - The purpose of this study is to examine the fiscal sustainability issue by dividing the fiscal deficit into high and low regimes using the quarterly data from 1997: Q1 to 2013: Q3. Further, we obtain the optimum level of public debt at which fiscal sustainability can be achieved. Design/methodology/approach - This study uses the Markov Switching-Vector Error Correction Model (MS-VECM) for examining fiscal sustainability and threshold regression model to obtain the optimum level of debt. Findings - The results derived from MS-VECM reveal the evidence in favor of fiscal sustainability during low fiscal deficit periods. Similarly, using a threshold regression model, the optimum public debt as a percentage to GDP seems to be around 21 per cent on a quarterly basis, beyond this level, public debt hurts economic growth. Practical implications - From the policy front, the government of India should cut down the fiscal deficit only if debt reaches beyond a threshold level. Originality/value - Noting that the vast literature has focused on examining the fiscal sustainability in India, the novelty of this study is to examine the fiscal sustainability by considering high and low deficits regimes using a non-linear approach.

Suggested Citation

  • Vaseem Akram & Badri Narayan Rath, 2019. "Fiscal sustainability in India: evidence from Markov switching and threshold regression models," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 38(2), pages 227-245, July.
    • Handle: RePEc:eme:sefpps:sef-09-2018-0281
    DOI: 10.1108/SEF-09-2018-0281
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    Citations

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    Cited by:

    1. Akram, Vaseem & Rath, Badri Narayan, 2020. "What do we know about fiscal sustainability across Indian states?," Economic Modelling, Elsevier, vol. 87(C), pages 307-321.
    2. Augustine, Blessy & Rafi, O.P.C. Muhammed, 2023. "Public debt - economic growth nexus in emerging and developing economies: Exploring nonlinearity," Finance Research Letters, Elsevier, vol. 52(C).

    More about this item

    Keywords

    Public debt; Fiscal Sustainability; Markov-switching model; Structural break test; Threshold regression; Economic growth; E62; F34; H63;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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