The Global Dimension to Fiscal Sustainability



Unless emerging market governments reduce their dependence on foreign capital
inflows by borrowing in domestic currency or reducing borrowing altogether through
fiscal reform, fiscal sustainability remains subject to global liquidity shocks.

As debt problems have been at the centre of many recent crises in emerging
markets, debt sustainability analysis has become standard practice when assessing
macro economic policy. The Present Value Constraint (PVC), or Intertemporal
Budget Constraint (IBC) approach, is often used to assess fiscal sustainability in
empirical studies. Fiscal policy is deemed sustainable, when the continuation of past
policies would keep future debt accumulation under control. Since Hamilton and
Flavin (1986) the PVC, equivalent to the Non-Ponzi game, or transversality, condition
has been tested using time series econometrics in numerous studies (e.g. Hamilton and
Flavin, 1986, Hakkio and Rush, 1991, Trehan and Walsh, 1991, MacDonald, 1992,
Ahmed and Rogers, 1995, Quintos, 1995, Mendoza and Ostry, 2006 and Arghyrou
and Luintel, 2007). In particular, Trehan and Walsh (1991) is of interest in what
follows since they emphasize the relationship between primary surplus and debt.

However, Bohn (2007) provides a substantial challenge to the time series
literature on fiscal policy. Specifically, Bohn suggested that rejections of stationarity-
based sustainability tests are invalid because in an infinite sample, any order of
integration of debt is consistent with the transversality condition which implies that
intertemporal budget constraint is always satisfied. Instead, Bohn (2007) emphasizes
whether a country’s primary surplus responds positively to debt as an indicator of
sustainability. As in Bohn (1998) this depends upon the assumption that the series are
stationary. For them to be related in a statistical sense when they are nonstationary,
they must be of the same order of integration and primary surplus and debt must be
cointegrated. We seek to shed light on this issue for industrial and emerging market



More intriguing information

1. CURRENT CHALLENGES FOR AGRICULTURAL POLICY
2. Notes on an Endogenous Growth Model with two Capital Stocks II: The Stochastic Case
3. The name is absent
4. Should Local Public Employment Services be Merged with the Local Social Benefit Administrations?
5. Volunteering and the Strategic Value of Ignorance
6. Aktive Klienten - Aktive Politik? (Wie) Läßt sich dauerhafte Unabhängigkeit von Sozialhilfe erreichen? Ein Literaturbericht
7. EMU: some unanswered questions
8. The name is absent
9. Commitment devices, opportunity windows, and institution building in Central Asia
10. The effect of classroom diversity on tolerance and participation in England, Sweden and Germany
11. Types of Tax Concessions for Promoting Investment in Free Economic and Trade Areas
12. The name is absent
13. Migrant Business Networks and FDI
14. Stakeholder Activism, Managerial Entrenchment, and the Congruence of Interests between Shareholders and Stakeholders
15. THE ANDEAN PRICE BAND SYSTEM: EFFECTS ON PRICES, PROTECTION AND PRODUCER WELFARE
16. The name is absent
17. Industrial Cores and Peripheries in Brazil
18. A Note on Costly Sequential Search and Oligopoly Pricing (new title: Truly Costly Sequential Search and Oligopolistic Pricing,)
19. Dual Track Reforms: With and Without Losers
20. Sustainability of economic development and governance patterns in water management - an overview on the reorganisation of public utilities in Campania, Italy, under EU Framework Directive in the field of water policy (2000/60/CE)