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Assessing Fiscal Sustainability Subject to Policy Changes: a Markov Switching Cointegration Approach

  • Vasco Gabriel

    (University of Surrey)

  • Pataaree Sangduan

    (Bureau of the Budget, Thailand)

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://www.fahs.surrey.ac.uk/economics/discussion_papers/2009/DP03-09.pdf
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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0309.

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Length: 21 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:sur:surrec:0309
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