Public Debt, the Unit Root Hypothesis and Structural Breaks: A Multi-Country Analysis

We assess fiscal performances in G7 and selected Latin American and Asian countries. We consider two questions: (i) Have public finances been sustainable? (ii) Do countries follow more restrictive fiscal policies when debt starts to rise? We find that: (i) the traditional unit root tests often overlook the corrective actions taken by many governments; controlling for structural breaks changes the non-stationarity results dramatically among the three groups; (ii) estimation of a reaction function for governments, expanded by incorporating structural breaks, provides further evidence for significant active anti-debt policies among G7 countries, and to a lesser extent in the other regions. Copyright (c) The London School of Economics and Political Science 2006.