tailieunhanh - Fiscal regimes and fiscal sustainability in Sri Lanka

This paper employs the regime-switching model-based fiscal sustainability test of Aldama and Creel (2017, 2018) which extends Bohn’s (1998) fiscal reaction function approach. There is evidence of a regime-switching fiscal rule in Sri Lanka for the period 1961-2017. Nonsustainable fiscal regime is identified only in two periods - 1978-1983 and 1986-1990 - while the other periods are defined by sustainable regimes. By considering the regime-specific feedback coefficients of the fiscal policy rule and the average durations of fiscal regimes, we find that Sri Lanka’s fiscal policy satisfies the No-Ponzi game condition. Nevertheless, the country’s longterm fiscal sustainability is in question given that the stricter debt-stabilizing condition is violated. Our results pose concerns for the credibility of adopting an inflation targeting framework in the absence of long-term fiscal sustainability. | UNIVERSITY OF WOLLONGONG AUSTRALIA School of Accounting Economics and Finance Working Paper Series 2019 http aef Fiscal Regimes and Fiscal Sustainability in Sri Lanka Chew Lian Chua Michael The University of Nottingham Ningbo School of Economics Nelson Perera School of Accounting Economics and Finance the University of Wollongong Sandy Suardi Corresponding author School of Accounting Economics and Finance the University of Wollongong WP 19-02 March 2019 Fiscal Regimes and Fiscal Sustainability in Sri Lanka Chew Lian Chua Michael 1 Nelson Perera2 Sandy Suardi3 1The University of Nottingham Ningbo School of Economics. 2School of Accounting Economic and Finance the University of Wollongong 3Corresponding author School of Accounting Economic and Finance the University of Wollongong Australia. Tel 61-2-42215525. E-mail ssuardi@ Abstract This paper employs the regime-switching model-based fiscal sustainability test of Aldama and Creel 2017 2018 which extends Bohn s 1998 fiscal reaction function approach. There is evidence of a regime-switching fiscal rule in Sri Lanka for the period 1961-2017. Non-sustainable fiscal regime is identified only in two periods - 1978-1983 and 1986-1990 - while the other periods are defined by sustainable regimes. By considering the regime-specific feedback coefficients of the fiscal policy rule and the average durations of fiscal regimes we find that Sri Lanka s fiscal policy satisfies the No-Ponzi game condition. Nevertheless the country s longterm fiscal sustainability is in question given that the stricter debt-stabilizing condition is violated. Our results pose concerns for the credibility of adopting an inflation targeting framework in the absence of long-term fiscal sustainability. JEL C2 E6 H6 Keywords Fiscal rules Fiscal regimes Public debt sustainability Markov-switching models Time-varying parameters 1 1. Introduction Sri Lanka s central bank is geared to adopt a flexible inflation .