A cross-sectional panel ARDL approach to fiscal sustainability analysis

Abstract

This study investigates the fiscal sustainability hypothesis for a panel of 88 countries from 2000–2020. We applied the cross-sectional panel ARDL methodology to estimate both short- and long-run effects, as well as fiscal reaction functions of government primary surplus in response to increases in public debt. This research introduces a novel approach to the analysis of fiscal sustainability by linking the ARDL model to the fiscal reaction framework, accounting for cross dependence among panel units. The countries were grouped according to the IMF income classification criteria. In pre-pandemic analysis, we found evidence of fiscal sustainability for advanced and emerging economies, but not for low-income countries. When incorporating the COVID-19 period, we observed a general decline in fiscal reactions, with the group of emerging countries being reclassified as unsustainable. This finding warns of the challenge faced by these governments to generate surpluses sufficient to offset the pandemic-induced increases in indebtedness.