Measuring fiscal policy sustainability in developing Asia: what does the Markov Switching Augmented Dickey-Fuller Test tell us?

Dannah Ysabel Premacio, Ezra Rebecca Vidar, Toby Monsod


This paper measures fiscal sustainability in 22 developing Asian countries for the period 1999–2017. Previous literature generates conflicting results: one paper applies the usual stationarity and cointegration tests and finds that fiscal policy is sustainable but in weak form. Another paper employs a fiscal reaction function and finds that fiscal policy is unsustainable. This paper uses an expanded version of the Markov Switching Augmented Dickey-Fuller test (MS-ADF), which remedies the shortcomings of conventional stationarity tests to provide more statistical power in the presence of nonlinearities and structural breaks. The MS-ADF has never been applied to this set of countries. Results show that the majority of the countries have “uncertain” debt trajectories, not definitively sustainable or unsustainable but somewhere in-between. This is a more nuanced picture of the debt trajectories in the region relative to what is obtained using the established methods. A more nuanced assessment could lead to more suitable policy corrections.

JEL classification: H63, C22


fiscal policy sustainability, public debt, stationarity test, Markov Switching-ADF

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