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The authors would like to thank Robert Blotevogel, Takuji Komatsuzaki, and the participants of a seminar at the Western Hemisphere Department of the International Monetary Fund (IMF), for their insightful comments and suggestions. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.
The average annual cost of weather-related damage in the Caribbean is 2.4 percent of GDP, about six times more than that of larger counties.
As shown by Daniel and Shiamptanis (2013) and Ghosh and others (2013), however, a positive β cannot be viewed as enough to achieve fiscal sustainability, if there is a limit for positive values of primary balances, for instance, at very high debt levels or if the reaction of financial markets is accounted for (e.g., the increase in the primary balance is not large enough to account for the exploding interest rate-growth differential)
Our sample of Caribbean countries includes Anguilla, Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
As robustness checks, we include the real effective exchange rate, the terms-of-trade index, a binary variable for the occurrence of natural disasters, and the presence of national and supranational fiscal rules.
The empirical evidence from a plethora of studies on fiscal reaction functions shows that the debt coefficient usually varies between 0.01 and 0.10 (Checherita-Westphal and Zdarek, 2017).
An emerging strand of the empirical literature on fiscal reaction functions, using real time data instead of ex post observations, finds countercyclical fiscal behavior, especially in advanced economies (Forni and Momigliano, 2004; Golinelli and Momigliano, 2006; Cimadomo, 2007; Beetsma and Giuliodori, 2008; Bernoth, Hallet, and Lewis, 2008). However, even though real time data may yield empirically better performing descriptions of fiscal behavior, such figures are available only for a limited number of mostly advanced economies.