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Assessing fiscal sustainability subject to policy changes: a Markov switching cointegration approach

  • Vasco Gabriel

    ()

  • Pataaree Sangduan

We propose a Markov switching cointegration approach to assess long run fi?scal sustainability. This method allows us to simultaneously: 1) test for cointegration in the presence of signifi?cant ?fiscal policy changes; 2) assess the type of fi?scal regime (whether strongly/weakly sustainable or unsustainable) that a country experienced at a given period and 3) analyse the timing of the transition between the estimated regime types. Given its flexibility, our approach enables us to uncover a richer and more complex dynamics in the analysis of fi?scal sustainability, which standard linear cointegration methods fail to capture.

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File URL: http://hdl.handle.net/10.1007/s00181-010-0369-4
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 41 (2011)
Issue (Month): 2 (October)
Pages: 371-385

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Handle: RePEc:spr:empeco:v:41:y:2011:i:2:p:371-385
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