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Is Fiscal Policy Sustainable in Developing Economies?

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  • Subrata Ghatak
  • José R. Sánchez-Fung

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.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 384.

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Date of creation: 21 Mar 2006
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Handle: RePEc:fer:dpaper:384

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Keywords: Fiscal policy sustainability; fiscal policy reaction functions; developing countries;

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References

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Cited by:
  1. Masato Shizume, 2007. "Sustainability of Public Debt: Evidence from Pre-World War II Japan," Discussion Paper Series 201, Research Institute for Economics & Business Administration, Kobe University.

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