The Fiscal Policy Response to Public Debt in Developing Countries

Abstract

Theoretical models on fiscal sustainability hypothesize that indebted governments can lower their current debt by generating future primary surpluses, ceteris paribus. While both developed and developing countries struggle with the issue of debt stabilization, the latter, in particular face heightened sensitivity from creditors, which provides them an impetus to respond more strongly to stabilize their debt. Based on a panel of 53 developing countries, we examine the fiscal response of these countries to changes in their debt‐to‐gross domestic product ratio. We find evidence of a positive relationship between the debt and primary surplus and that countries adjust along both the revenue and expenditure margins at roughly the same rate. (JEL E62, H50, O11)

Estimating Fiscal Reaction Functions for Developing and Developed Countries: A Dynamic Panel Threshold Analysis

“…Other than the quadratic or cubic functional forms, another way of detecting the non-linearity is to use the spline and threshold regressions (Mendoza and Ostry, 2008;Small et al, 2020). This approach makes a distinction between low and high debt ratios.…”

“…Interestingly, except a small number of studies such as Burger et al (2011), de Mello (2008, Turan and Telatar (2013), Small et al (2020), andTetik et al (2022), the literature extensively estimates the fiscal reaction functions to analyze the sustainability and cyclicality of fiscal policy for developed or advanced countries. However, it is not straightforward to generalize the findings obtained for developed countries to developing ones.…”

“…Since the presence of an inertia is very likely in this subject, using a dynamic approach would be crucial. Third, in the literature only a few studies pay attention to the government expenditure and revenue as a proxy for fiscal stance in estimating the fiscal reaction functions (Reicher, 2013;Egert, 2014;Small et al, 2020). To provide more insights on the fiscal policy, we include the government expenditure and revenue as the dependent variables in the fiscal reaction functions.…”

Influence of fiscal policy on GDP: an empirical study of GCC countries

“…With this background, the region is facing a severe crisis in terms of falling crude prices, as the data over the past decade suggest a clear picture of how the fall in oil prices affected the macroeco-nomic environment in the GCC region, while in other countries, the fall in oil prices has augmented the fiscal space due to reduced energy subsidies (Schwab, 2017).…”

The Risk of a Second Wave of Post-Crisis Frailty in the World Economy

“…But excessive caution will often be doubly prejudicial. Initially, a conservative fiscal position will weaken domestic sources of growth and adversely affect economic and social development (Addison, Niño-Zaraz ua, and Pirttil€ a 2018;Roy and Weeks 2004;Small, Brown, and Canavire-Bacarreza 2020;Martnen and Tromben, 2004). Then, if an external shock actually occurs, the economy is less able to cope with it because of a relatively weaker public sector and the dislocations in currency and capital markets force even more severe and lasting adjustments.…”