Fiscal sustainability in an emerging market economy: when does public debt turn bad?
This paper proposes a Markov-switching model to assess the sustainability of fiscal policy in Malaysia for the period 1980–2014. Our results indicate the policymakers in the past have followed a sustainable fiscal policy, except during the brief periods of economic difficulty. The empirical analysis...
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| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
Elsevier
2017
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| Online Access: | http://psasir.upm.edu.my/id/eprint/61893/1/Fiscal%20sustainability%20in%20an%20emerging%20market%20economy.pdf http://psasir.upm.edu.my/id/eprint/61893/ https://www.sciencedirect.com/science/article/pii/S0161893816300990 |
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| Summary: | This paper proposes a Markov-switching model to assess the sustainability of fiscal policy in Malaysia for the period 1980–2014. Our results indicate the policymakers in the past have followed a sustainable fiscal policy, except during the brief periods of economic difficulty. The empirical analysis reveals that the government should cut the deficits only if they exceed a certain level, to ensure their sustainability in the long-run. Specifically, we find that after public debt exceeds a certain threshold level (above 55% of the gross domestic product), it is negatively correlated with economic activity. In addition to the threshold effect, we confirm the presence of a unidirectional causal relation between debt and growth. |
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