Riding the Storm: Fiscal Sustainability in the Caribbean

January 31, 2020

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Serhan Cevik, and Vibha Nanda. Riding the Storm: Fiscal Sustainability in the Caribbean, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Fiscal sustainability remains a paramount challenge for small economies with high debt and greater vulnerability to climate change. This paper applies the model-based sustainability test for fiscal policy in a panel of 16 Caribbean countries during the period 1980–2018. The results indicate that the coefficient on lagged government debt is positive and statistically significant, implying that fiscal policy in the Caribbean takes corrective actions to counteract an increase in the debt-to-GDP ratio. Nonlinear estimations, however, show that the quadratic debt parameter is negative, which indicates that fiscal policy response is not adequate to ensure sustainability at higher levels of debt. We also find that the fiscal stance tends to be countercyclical on average during the sample period. These empirical results confirm that maintaining prudent fiscal policies and implementing growth-enhancing structural reforms are necessary to build fiscal buffers and ensure debt sustainability with high probability even when negative shocks occur over the long term.

Subject: Expenditure, Fiscal policy, Fiscal stance, Fiscal sustainability, Output gap, Production, Public debt

Keywords: Caribbean, Debt accumulation, Debt sustainability, Expenditure policy, Expenditure series, Fiscal policy, Fiscal policy path, Fiscal policy reaction, Fiscal policy response, Fiscal reaction function, Fiscal solvency, Fiscal stance, Fiscal sustainability, Government, Interest rate, Output gap, Output gap in the Caribbean, Output gap variable, Potential GDP, Prudent fiscal policies, Reaction to an increase, Sustainability of fiscal policy, WP

Publication Details

Pages:

19
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/021
Stock No:

WPIEA2020021
ISBN:

9781513526362
ISSN:

1018-5941

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