Sustainability of Fiscal Policy: A Comparison of Contemporary Models for Asian Developing Countries

Abstract

This study compares two well-known models used for assessing the sustainability of fiscal policy. The Model-Based test, an OLS-based model of sustainability, either adds little value or is a potentially unreliable approach to assessing the sustainability of fiscal policy. We use panel unit root and cointegration tests for this purpose and find that the primary surplus and debt are nonstationary in levels for the Asian Developing countries in our sample. The existence of cointegration between the primary surplus-GDP and debt-GDP ratio determines the sustainability of fiscal policy without requiring the series to be regressed on each other.