Sustainability of fiscal policy: the case of Albania

This discussion material focuses on evaluating the long-run meanreverting properties of debt to GDP ratio by unit root approach. Findings demonstrate that the debt to GDP is mean-reverting over time, while there seems to be no evidence when this indicator is measured in real terms. Further, the material considers a fiscal policy reaction function to understand whether government pursued appropriate policies to avoid excessive debt accumulation. Results presume that fiscal authorities react systematically to raising debt ratio, by generating future surpluses, but not enough to avoid excessive debt accumulation. Comparing simultaneously results from both approaches implies that Albanian fiscal policy is sustainable. But, the profligacy of fiscal authorities put it at risk, considering that the pursued fiscal policies do not avoid excessive debt accumulation. Error term analysis reveals that fiscal policy has been stable across time, even though evidence seems to illustrate that global financial and economic crisis had a negative impact. However, evidence seems to suggest that fiscal policy is relatively volatile when public debt is close to or above the 60 per cent of GDP ratio.