We assess fiscal performances in G7 and selected Latin American and Asian countries. We analyze two questions: (i) have public finances been sustainable? (ii) do countries follow more restrictive fiscal policies when debt starts to rise? We find that: (i) The traditional unit root tests often overlook the corrective actions taken by many governments. Controlling for structural breaks changes the nonstationarity results dramatically among the three groups; (ii) Estimation of a reaction function for governments, expanded by incorporating structural breaks, provides further evidence for significant active anti-debt policies among the G7 and to a lesser extent in the other regions.

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This paper relaxes a fundamental hypothesis commonly accepted in the expectation formation literature: expectations are, unchangingly, either rational or generated by one of the three simple extrapolative, regressive, or adaptive processes. Using expectations survey data provided by Consensus Forecasts on six European exchange rates against the US dollar, we find that the rational expectations hypothesis is rejected at the aggregate level. By implementing a switching-regression methodology with stochastic choice of regime, we show that the expectation generating process is given at any time by some combination of the three simple processes. An interpretation of this framework in terms of economically rational expectations is suggested. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd.