A Nonlinear Approach to Public Finance Sustainability in Latin America
U of London Queen Mary Economics Working Paper No. 486
20 Pages Posted: 7 Aug 2003
Date Written: January 2003
Public finance sustainability plays a central role in the stabilization efforts in Latin America. The emphasis on fiscal policy in these countries goes back to the debt crisis of the 1980s, which was associated with large fiscal imbalances. We analyze the sustainability of government debt for a sample of Latin American countries, employing unit root tests that incorporate nonlinear alternative hypotheses. These tests capture the potential thresholds or corridor behavior that international agreements or markets impose on emerging economies' public finances. We show that support for sustainability substantially improves when the possibility of nonlinear mean-reversion is taken into account.
JEL Classification: H6, H87
Suggested Citation: Suggested Citation