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

• Main Authors: Baharumshah, A.Z, Soon, Siewvoon, Lau, Evan
• Format: E-Article
• Language: English
• Published: Elsevier B.V. 2017
• Subjects: HG Finance
• Online Access: http://ir.unimas.my/id/eprint/15340/2/ScienceDirectFiscal%20sustainability%20in%20an%20emerging%20market%20economy%20%28abstract%29.pdf; http://ir.unimas.my/id/eprint/15340/; https://www.scopus.com/inward/record.uri?eid=2-s2.0-85008313687&doi=10.1016%2fj.jpolmod.2016.11.002&partnerID=40&md5=747fb39ea9becdfbf141f3ac82fd5e5d
• Institution: Universiti Malaysia Sarawak

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