International Evidence on Fiscal Solvency: Is Fiscal Policy "Responsible"?

42 Pages Posted: 9 Mar 2007 Last revised: 18 Nov 2022

See all articles by Enrique G. Mendoza

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Jonathan D. Ostry

Georgetown University; International Monetary Fund (IMF)

Date Written: March 2007

Abstract

This paper looks at fiscal solvency and public debt sustainability in both emerging market and advanced countries. Evidence of fiscal solvency, in the form of a robust positive conditional relationship between public debt and the primary fiscal balance, is established in both groups of countries, as well as in the sample as a whole. Evidence of fiscal solvency is much weaker, however, at high debt levels. The debt-primary balance relationship weakens considerably in emerging economies as debt rises above 50 percent of GDP. Moreover, the relationship vanishes in high-debt countries when the countries are split into high- and low-debt groups relative to sample means and medians, and this holds for industrial countries, emerging economies, and in the combined sample. These findings suggest that many industrial and emerging economies, including several where fiscal solvency has been the subject of recent debates, appear to conduct fiscal policy responsibly. Yet our results cannot reject the hypothesis of fiscal insolvency in groups of countries with high debt ratios, where the response of the primary balance to increases in debt is not statistically significant.

Suggested Citation

Mendoza, Enrique G. and Ostry, Jonathan D., International Evidence on Fiscal Solvency: Is Fiscal Policy "Responsible"? (March 2007). NBER Working Paper No. w12947, Available at SSRN: https://ssrn.com/abstract=969625

Enrique G. Mendoza (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

Jonathan D. Ostry

Georgetown University ( email )

Washington, DC 20057
United States

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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