TY  - JOUR
AU  - Mendoza,Enrique G.
AU  - Ostry,Jonathan D.
TI  - International Evidence on Fiscal Solvency: Is Fiscal Policy "Responsible"?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12947
PY  - 2007
Y2  - March 2007
UR  - http://www.nber.org/papers/w12947
L1  - http://www.nber.org/papers/w12947.pdf
N1  - Author contact info:
Enrique G. Mendoza
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3845
Fax: 301/405-7835
E-Mail: mendozae@econ.umd.edu

Jonathan D. Ostry
Research Department
International Monetary Fund
HQ1-10-700
700 19th Street, N.W.
Washington DC, 20431
E-Mail: jostry@imf.org
AB  - 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.
ER  -