Debt threshold for fiscal sustainability assessment in emerging economies

Tran, T 2018, 'Debt threshold for fiscal sustainability assessment in emerging economies', Journal of Policy Modeling, vol. 40, no. 2, pp. 375-394.


Document type: Journal Article
Collection: Journal Articles

Title Debt threshold for fiscal sustainability assessment in emerging economies
Author(s) Tran, T
Year 2018
Journal name Journal of Policy Modeling
Volume number 40
Issue number 2
Start page 375
End page 394
Total pages 20
Publisher Elsevier
Abstract This paper explores the debt threshold for fiscal sustainability assessment for 14 emerging economies during the period 19992016. The threshold point is identified as the level which, if exceeded, promptly raises sovereign risk to an unsustainable level. As such, we employ a panel threshold analysis to the determination of debt limit, which can serve as a distinctive feature from other studies on fiscal sustainability. Our results demonstrate that non-Latin American economies are considered to be sustainable in the short run, as their debts remain below the threshold bounds of 4055% of GDP. However, the long-run sustainability risk may emerge from a continuous upward trend in debt paths, implying the need for rebuilding fiscal buffers. It is important to emphasize that fiscal sustainability is far more challenging for most Latin-American economies. This is indicated by their debt accumulation beyond the threshold level of roughly 35% of GDP which is relatively lower than that estimated for the other countries. Indeed, during times of high debt, emerging countries in Latin America also face higher default risk since their sovereign risk premium respond more strongly to debt rise. Their paths toward fiscal sustainability, hence, requires an immediate imposition of strict fiscal discipline to relieve the debt pressure. © 2018 The Society for Policy Modeling
Subject Time-Series Analysis
Keyword(s) Fiscal sustainability
Government debt
Panel threshold regression models
Sovereign risk premium
DOI - identifier 10.1016/j.jpolmod.2018.01.011
Copyright notice © 2018 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
ISSN 0161-8938
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