The Global Dimension to Fiscal Sustainability

The Global Dimension to Fiscal Sustainability

Joseph P. Byrne, Norbert Fiess^* and Ronald MacDonald

Department of Economics, University of Glasgow, Glasgow, Scotland, UK
31^st March 2008

Abstract

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.

Keywords: Fiscal Policy; Sustainability.

JEL Codes: E62; F34; H62; H63.

^* Correspondence Address: University of Glasgow, Department of Economics, Adam Smith Building,
Glasgow, G12 8RT, United Kingdom. Email: <[email protected]>. Tel: +44(0)141 330 5683. Fax:
+44 (0)141 330 4940. For their comments and other discussions the authors would like to thank
without implicating seminar participants at the World Bank, Washington and SIRE Conference on
Economic and Financial Linkages in the University of Glasgow. In particular, Marco Bassi, Aleksander
Berensten, Nina Budina, Giorgio Fazio, David Hendry, S0ren Johansen, Alexandros Kontonikas,
Farhad Noorbakhash and Brian Pinto.

1   2   3   4   >>

More intriguing information