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Fiscal sustainability in an emerging market economy: When does public debt turn bad?

Listed author(s):
  • Baharumshah, Ahmad Zubaidi
  • Soon, Siew-Voon
  • Lau, Evan

This paper proposes a Markov-switching model to assess the sustainability of fiscal policy in Malaysia for the period 1980–2014. Our results indicate the policymakers in the past have followed a sustainable fiscal policy, except during the brief periods of economic difficulty. The empirical analysis reveals that the government should cut the deficits only if they exceed a certain level, to ensure their sustainability in the long-run. Specifically, we find that after public debt exceeds a certain threshold level (above 55% of the gross domestic product), it is negatively correlated with economic activity. In addition to the threshold effect, we confirm the presence of a unidirectional causal relation between debt and growth.

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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 39 (2017)
Issue (Month): 1 ()
Pages: 99-113

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Handle: RePEc:eee:jpolmo:v:39:y:2017:i:1:p:99-113
DOI: 10.1016/j.jpolmod.2016.11.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

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