Fiscal Sustainability in the Caribbean: An Econometric Analysis

Abstract

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Searching for a Safe Harbor: Fiscal Policy Responses in Small Island Developing States

“…Recent studies have produced conflicting results for broad fiscal policy in SIDS. Khadan (2019) finds a pro-cyclical fiscal policy while Cevik and Nanda (2020) find a counter-cyclical fiscal policy (but a procyclical government spending bias) in the Caribbean using a comparable collection of countries across overlapping time periods. On the other hand, several studies have identified evidence for the twin deficits hypothesis in the Euro Area (Checherita-Westphal and Žďárek 2017; Everaert and Jansen 2017) and the Caribbean (Khadan 2019) thus reinforcing the endogeneity concern within this space.…”

“…For example, policy makers take into account both the last period's debt levels as well as the historical primary balance when setting in place their current target for the primary balance. There is evidence of strong persistence of primary balances in the Caribbean (Khadan 2019;Cevik and Nanda 2020), and the Euro Area (Checherita-Westphal and Žďárek 2017; Everaert and Jansen 2017).…”

“…However, across the research on fiscal sustainability, most research has focused on advanced and emerging economies, and has overlooked developing countries, especially small island developing states (SIDS). 2 Recently, Khadan (2019) and Cevik and Nanda (2020) expanded the focus towards SIDS, but the sample was restricted geographically to the Caribbean region. There has been no attempt, that we know of, to broadly include all SIDS.…”

Riding the Storm

“…Empirical studies tend to reflect fiscal behavior in large Latin American countries rather than small island states in the Caribbean. A few studies focusing on Latin America and the Caribbean obtain evidence of weak fiscal policy response to an increase in the debt-to-GDP ratio (Kufa, Pellechio, and Rizavi, 2003;Alberola and Montero, 2006;SELA, 2013;Campo-Robledo and Melo-Velandia, 2015;Khadan, 2019;Kemoe and Lonkeng, 2020). Similarly, analyzing the cyclical stance of fiscal policy in Latin America and the Caribbean, Daude, Melguizo, and Neut (2011), Klemm (2014) and Alberola and others (2016) find that fiscal policy is procyclical on average.…”

Tax Buoyancy in the Caribbean: Evidence from Heterogenous Panel Cointegration Models

“…Real GDP growth has returned, although it is still lower than the pre-crisis level, but fiscal imbalances and high debt levels continue to present challenges for some countries. Recent evidence from an intertemporal budget constraint and fiscal reaction functions also suggest that fiscal sustainability in the region has been weak (Khadan, 2019). Some countries, such as Barbados and Jamaica, are undertaking reform programs with the support of the International Monetary Fund (IMF), while others, such as Suriname and Trinidad and Tobago, are pursuing home-grown reform programs to address their respective macroeconomic challenges.…”