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Riding the Storm: Fiscal Sustainability in the Caribbean
Author:
Mr. Serhan Cevik
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https://orcid.org/0000-0002-2373-2023
and
Vibha Nanda null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 021
Language:
English
Publication Date:
31 Jan 2020
DOI:
https://doi.org/10.5089/9781513526362.001
ISBN:
9781513526362
ISSN:
1018-5941
Pages:
19
Keywords:
WP; potential GDP; government; Debt sustainability; fiscal reaction function; fiscal policy; fiscal solvency; output gap variable; reaction to an increase; debt accumulation; prudent fiscal policies; fiscal policy reaction; interest rate; fiscal policy response; fiscal policy path; sustainability of fiscal policy; expenditure series; expenditure policy; output gap in the Caribbean; Fiscal stance; Fiscal sustainability; Output gap; Caribbean
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Fiscal sustainability remains a paramount challenge for small economies with high debt and greater vulnerability to climate change. This paper applies the model-based sustainability test for fiscal policy in a panel of 16 Caribbean countries during the period 1980–2018. The results indicate that the coefficient on lagged government debt is positive and statistically significant, implying that fiscal policy in the Caribbean takes corrective actions to counteract an increase in the debt-to-GDP ratio. Nonlinear estimations, however, show that the quadratic debt parameter is negative, which indicates that fiscal policy response is not adequate to ensure sustainability at higher levels of debt. We also find that the fiscal stance tends to be countercyclical on average during the sample period. These empirical results confirm that maintaining prudent fiscal policies and implementing growth-enhancing structural reforms are necessary to build fiscal buffers and ensure debt sustainability with high probability even when negative shocks occur over the long term.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund