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Fiscal sustainability in highly indebted countries: evidence from Jamaica

Fiscal sustainability in highly indebted countries: evidence from Jamaica This study aims to explore the sustainability of Jamaica’s public debt over a highly volatile period of time.Design/methodology/approachThe authors use a suite of econometric tools, including, unit root testing, cointegration testing and estimating a fiscal reaction function. The authors control for structural breaks in the regression analysis.FindingsThe authors find that whilst reschedulings might be indicative of cash-flow problems in Jamaica, fiscal policy has responded effectively to increase the public debt, thereby making the debt sustainable. Notwithstanding the political economy and social demands of the population prior to the impact of the pandemic, the implications of higher debt stocks (higher debt-servicing and lower social expenditures) might make this approach to fiscal policy and debt management infeasible. As a result, the authors recommend that the government will need to take an active approach in managing its debt position to facilitate responses to shocks and provide conditions within which maintaining fiscal discipline is feasible.Originality/valueTo the best of the authors’ knowledge, this is the first study to explore fiscal sustainability in Jamaica over this time period whilst taking into consideration structural breaks caused by the global financial crisis and debt restructurings. The authors also take into consideration variables such as exchange rates and the occurrence of elections, which have not been included in previous studies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Development Issues Emerald Publishing

Fiscal sustainability in highly indebted countries: evidence from Jamaica

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1446-8956
eISSN
1446-8956
DOI
10.1108/ijdi-01-2022-0003
Publisher site
See Article on Publisher Site

Abstract

This study aims to explore the sustainability of Jamaica’s public debt over a highly volatile period of time.Design/methodology/approachThe authors use a suite of econometric tools, including, unit root testing, cointegration testing and estimating a fiscal reaction function. The authors control for structural breaks in the regression analysis.FindingsThe authors find that whilst reschedulings might be indicative of cash-flow problems in Jamaica, fiscal policy has responded effectively to increase the public debt, thereby making the debt sustainable. Notwithstanding the political economy and social demands of the population prior to the impact of the pandemic, the implications of higher debt stocks (higher debt-servicing and lower social expenditures) might make this approach to fiscal policy and debt management infeasible. As a result, the authors recommend that the government will need to take an active approach in managing its debt position to facilitate responses to shocks and provide conditions within which maintaining fiscal discipline is feasible.Originality/valueTo the best of the authors’ knowledge, this is the first study to explore fiscal sustainability in Jamaica over this time period whilst taking into consideration structural breaks caused by the global financial crisis and debt restructurings. The authors also take into consideration variables such as exchange rates and the occurrence of elections, which have not been included in previous studies.

Journal

International Journal of Development Issues – Emerald Publishing

Published: Sep 20, 2022

Keywords: Fiscal sustainability; Fiscal reaction function; Public debt; Deficits; C22, E62, H62, H63

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