The dynamics of fiscal sustainability

• Main Author: Sangduan, Pataaree
• Published: University of Surrey 2008
• Subjects: 339.52
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.493215

The importance of achieving a sustainable fiscal budget deficit has received increasing attention from academics and policy-makers. A stable long-term relationship between government expenditures and revenues is a key requirement for macroeconomic stability and development. Thus, this dissertation addresses the issue of fiscal sustainability from an empirical perspective. We illustrate how different methodologies can be applied to the analysis of fiscal sustainability, some of which are novel in context of this literature. We first look at the application of an Indicator of Fiscal Sustainability, based on Blanchard (1990) and Croce and Juan-Ramon (2003), to a variety of countries. We then propose an efficient test for 'strong' fiscal sustainability, using the procedures of Horvath and Watson (1995) for inference when the cointegration vector is pre-specified. We show that regime shifts are pervasive in this context and suggest a Markov switching cointegration approach to test and model fiscal sustainability subject to regime changes. Finally, we model the dynamics of Thailand's discounted debt using the Markov switching framework developed by Davig (2005).