The Global Dimension to Fiscal Sustainability

The evidence reported in Table 5 for the primary surplus/ debt regression is in
line with the studies of Bohn (1998) for the US and Mendoza and Ostry (2007) for
emerging market economies which report that an increase in debt/GDP results in a
higher primary surplus. However, our estimated results are smaller than those
reported in Mendoza and Ostry. Next we use the identified coefficient to test for
cointegration by means of the Bai and Ng (2004) PANIC approach.

<Insert Table 5 here>

<Insert Table 6 here>

In Table 6 Bai and Ng (2004) identifies the common factor as nonstationary,
while the idiosyncratic component is stationary. While overall we fail to identify
cointegration between debt/GDP and primary surplus in a panel setting for emerging
market economies, it is interesting to observe that the country-specific factors
contribute to fiscal sustainability; it is the common factor, that implies debt is not
sustainable in emerging markets, as it display a stochastic trend (i.e. the idiosyncratic
element is stationary while the factor is nonstationary).

We believe that this is an important finding, with potentially strong policy
implications. The fact that country-specific factors have been working on average
towards debt sustainability during the 1990s and the first half of the 2000s, shows that
national fiscal policies are broadly in line with requirements for fiscal sustainability;
given a continuation of current fiscal policies, the main threat to fiscal sustainability
appears not to come from the conduct of fiscal policies, but, rather, from common
factors which are beyond the control of an individual country: it is the nonstationarity
of the common factor that is interfering with the sustainability of fiscal positions.

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