Fiscal sustainability in an emerging market economy: When does public debt turn bad?

Baharumshah, A. Z and Soon, Siewvoon and Lau, Evan (2016) Fiscal sustainability in an emerging market economy: When does public debt turn bad? Journal of Policy Modeling. ISSN 01618938

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Abstract

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. © 2016 The Society for Policy Modeling

Item Type: Article
Uncontrolled Keywords: Debt; Economic growth; Endogenous multiple breaks; Fiscal sustainability, research, Universiti Malaysia Sarawak, unimas, university, universiti, Borneo, Malaysia, Sarawak, Kuching, Samarahan, ipta, education
Subjects: H Social Sciences > HG Finance
Divisions: Academic Faculties, Institutes and Centres > Faculty of Economics and Business
Depositing User: Ibrahim
Date Deposited: 17 Feb 2017 02:17
Last Modified: 17 Feb 2017 02:17
URI: http://ir.unimas.my/id/eprint/15340

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