The Global Dimension to Fiscal Sustainability

with the difficulties that emerging market economies have in issuing debt. These
countries pursue fiscal policies focused on debt sustainability which leaves them little
opportunity to purse the welfare enhancing fiscal policies adopted in industrial
countries. Our results are robust to potential endogeneity between output and
government spending since we use adopt a panel GMM.

Our research potentially has strong research implications since there is
evidence to indicate that emerging market economies pursue sensible long run fiscal
policies. Therefore the fiscal difficulties that they experience may be ameliorated by
giving them greater access to capital markets without risking the possibility that these
countries consequently adopt unsustainable fiscal policies.¹⁹

¹⁹ See the discussion in Williamson (2003) for a contrast of the respective positions on this topic from
Eichengreen and Rogoff. Also see Eichengreen (2007) for a discussion of possible means of allowing
emerging market economies access to external capital, through an IMF Reserve Augmentation Line,
for example.

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