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The Global Dimension to Fiscal Sustainability

  • Byrne, Joseph P.
  • Fiess, Norbert
  • MacDonald, Ronald

This paper examines the issue of fiscal sustainability in emerging market countries and industrial countries. We highlight the importance of the time series properties of the primary surplus and debt, and find evidence of a positive long run relationship. Consequently we emphasise, that especially for emerging markets, it is important to recognise the implications of global capital market shocks for fiscal sustainability, a relationship which has hitherto been ignored in the empirical literature. Using a factor model we demonstrate that the relationship between deficit and debt is conditional upon a global factor and we suggest that this global factor is related to world-wide liquidity. We also demonstrate that this acts as a constraint on emerging market economies’ fiscal policy.

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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2008-14.

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Date of creation: 2008
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Handle: RePEc:edn:sirdps:27
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