Riding the Storm: Fiscal Sustainability in the Caribbean

20 Pages Posted: 28 Feb 2020

See all articles by Serhan Cevik

Serhan Cevik

International Monetary Fund (IMF)

Vibha Nanda

International Monetary Fund (IMF)

Date Written: January 2020

Abstract

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.

Keywords: Financial statistics, Fiscal policy, Economic growth, Deficit financing, Financial crises, Debt sustainability, fiscal reaction function, fiscal solvency, WP, debt-to-GDP ratio, debt-to-GDP, output gap, primary balance, policy stance

JEL Classification: E62, H6, H61, H62, H63, H68, E01, H83, C

Suggested Citation

Cevik, Serhan and Nanda, Vibha, Riding the Storm: Fiscal Sustainability in the Caribbean (January 2020). IMF Working Paper No. 20/21, Available at SSRN: https://ssrn.com/abstract=3545287

Serhan Cevik (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Vibha Nanda

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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