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Jeetendra Khadan and Amrita Deonarine
''Testing the Inter-temporal Budget Constraint for Small States''
( 2019, Vol. 39 No.2 )
The issue of fiscal sustainability has emerged as a major challenge for governments in small states due to spillovers of global shocks such as the global financial crisis, commodity price shocks, and the increased occurrence and intensity of natural hazards. Given the weak fiscal situation in small states -relatively high debt to GDP ratios and large fiscal imbalances- this paper follows the inter-temporal budget constraint approach to provide a robust econometric assessment of fiscal sustainability for a panel of 15 small states over the period 1991-2017 using recent advances in panel cointegration. The findings show the existence of cointegration between government revenues and expenditure, but with the magnitude of the long-run coefficient of public expenditure less one indicating that fiscal policy is “weakly” sustainable.
Keywords: Inter-temporal budget constraint, panel cointegration, small states
JEL: C1 - Econometric and Statistical Methods: General
E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
Manuscript Received : Jan 31 2019 Manuscript Accepted : May 15 2019

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