Fiscal Sustainability of Latin American Countries Under Cross-Dependency and Structural Breaks

Abstract

This work investigates the hypothesis of fiscal sustainability for 18 Latin American countries from 1991 to 2022. We applied a panel cointegration methodology to evaluate the existence of a long-term relationship between government revenue and expenditures, incorporating cross-sectional dependence and endogenously estimated structural breaks. Since Latin American economies are heterogeneous, a unified analysis was not effective. Therefore, we grouped countries according to economic, financial, and geographic features, which made it possible to handle distinct fiscal patterns among them and identify a sustainable group of 6 countries. We also provided empirical evidence for the role played by cross-dependence terms, carefully selected control variables, and the proper estimation and modelling of the breakpoints. The impacts of COVID-19 have proven to be crucial in making some countries unsustainable.