Debt sustainability and the fiscal reaction function: evidence from MIST countries

Abstract

The use of public debt is not new in financing developmental objectives. A significant challenge arose when it became obvious that the indebted countries could not fulfill its existing financial obligation to the rest of the world where debt is sourced. For a panel of 4 heterogeneous countries from 1990 to 2017, we study governments’ reactions to debt accumulation and the corrective measures taken when its borrowings result in a rise in debt–GDP ratio. The study evidence is based on the fixed effect and the feasible generalized least squares estimators. We find evidence that primary balance improves by about 0.005–0.013 for every 1 percentage point increase in central government debt after controlling for other relevant factors. The results further suggest that the accrued interest payments on debt reflect the effective debt management policies across the countries, whereas the activities on the current account balance impose a possible threat to the primary balance. The study calls for policies that increase fiscal bases through the reduction in fiscal expenditure and the reinforcement of tax base revenue across the MIST countries.

Impact of Local Official Corruption on Local Government Debt in China: The Mediating Role of Government Investment Efficiency

“…Based on the static panel data model, in this paper, we use the panel feasible generalized least square method (FGLS) to effectively solve the problems of heteroscedasticity and sequence dependence in processing and analyzing the data (Ogbeifun & Shobande, 2020). All the regression results in this paper are obtained with this FGLS model.…”

Quantile Debt Fan Charts

“…In the literature, fiscal reaction functions are often estimated using panel regression methods (Ogbeifun and Shobande 2020, Checherita-Westphal and Žďárek 2017, Cevic and Nanda 2020, Ferrarini and Ramayandi 2012, Everaert and Jansen 2018, except for Berti et al's (2016) paper, which estimates country-specific fiscal reaction functions. Although country-specific fiscal reaction functions offer some advantages over panel techniques, i.e., better capturing country specificities, they require very long time period data.…”