Assessing fiscal sustainability subject to policy changes: a Markov switching cointegration approach

Abstract

We propose a Markov switching cointegration approach to assess long run fiscal sustainability. This method allows us to simultaneously: (1) test for cointegration in the presence of significant fiscal policy changes; (2) assess the type of fiscal regime that a country experienced at a given period and (3) analyse the timing of the transition between the estimated regime types. Given its flexibility, our approach enable us to uncover a richer and more complex dynamics in the analysis of fiscal sustainability, which standard linear cointegration methods fail to capture.

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Correspondence to Vasco J. Gabriel.

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Gabriel, V.J., Sangduan, P. Assessing fiscal sustainability subject to policy changes: a Markov switching cointegration approach. Empir Econ 41, 371–385 (2011). https://doi.org/10.1007/s00181-010-0369-4

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Keywords

  • Fiscal sustainability
  • Markov switching
  • Cointegration

JEL Classification

  • C22
  • E62
  • H60