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Mr. Yehenew Endegnanew, Charles Amo-Yartey, and Ms. Therese Turner-Jones


This chapter examines the empirical link between fiscal policy and the current account focusing on microstates, defined as countries with a population of less than 2 million between 1970 and 2009. The extent to which fiscal adjustment can lead to predictable development in the current account remains controversial, with two competing views. The traditional view argues that changes in fiscal policy are associated with changes in the current account through a number of channels that are discussed in the literature review. The traditional view is challenged by the Ricardian equivalence principle, which states that an increase in budget deficit (through reduced taxes) will be offset by increases in private saving, insofar as the private sector fully discounts the future tax liabilities associated with financing the fiscal deficit, hence not affecting the current balance.

Garth Peron Nicholls and Alexandra Peter


This chapter reviews different concepts of debt sustainability and gives illustrative results on debt limits for economies based on macroeconomic characteristics prevailing in the Caribbean region. In particular, we deal with three important policy-related issues: First, we delineate key aspects of the different approaches to measure fiscal sustainability and public debt limits; second, we measure the sustainability of fiscal policy and the extent of over- or under-borrowing by the public sector over the last two decades; and third, we derive debt benchmarks through illustrative scenarios, using reasonable assumptions about growth and interest rate shocks from the region’s economies.

Alexandra Peter


The Caribbean has a track record of high fiscal deficits, partly reflecting procyclical fiscal policies in good times. This has resulted in elevated levels of public-debt-to-GDP ratios since 1990. The predominant source of the budget imbalance is the central governments, even though public enterprises have also contributed significantly to the debt buildup. The debt accumulation stems from countercyclical fiscal policy in bad times and procyclical fiscal policy during periods of economic boom. The net result is that debt which has accumulated during periods of weak growth is not offset in good times, resulting in higher levels of debt in the medium term (Egert, 2011).

Joel Chiedu Okwuokei


A number of governments across the world have adopted fiscal policy rules, especially against the backdrop of worsening fiscal performances and rising debt levels. Recently, following the financial crisis, fiscal rules have been advocated to support fiscal consolidation efforts and to ensure long-term sustainability of government finances. This chapter empirically analyzes the impacts of fiscal rules on fiscal performance in microstates with a focus on the Caribbean, where fiscal consolidation has been a major challenge. Broadly, we address three questions. Are there fiscal rules in microstates in general, and in the Caribbean in particular? If the answer is yes, what types of rules exist and what are their characteristics? Is the existence of fiscal rules in microstates associated with improved fiscal performance?

Charles Amo-Yartey and Ms. Therese Turner-Jones


Caribbean economies face high and rising debt-to-GDP ratios that jeopardize prospects for medium-term debt sustainability and growth. In 2011, the region’s overall public sector debt was estimated at about 70 percent of regional GDP (Figure 1.1). Interest payments on the existing debt stock in the most highly indebted countries with rising debt ratios are already in the range of 16 percent to 42 percent of total revenues. In addition, high amortization exposes some countries to considerable roll-over risk that could trigger a fiscal crisis.