Testing Fiscal Sustainability in the Republic of Macedonia - A VAR Approach
Date Issued
2017
Author(s)
Abstract
The recent global financial and economic crisis caused great concerns in many developed
countries (especially in the European Union) due to rising debt levels and deterioration of their
fiscal space. The adverse effects of high indebtedness highlighted the importance of maintaining
sustainable public finances. This problem was not limited to rich and highly developed
economies. The Republic of Macedonia also experienced such developments in the fiscal area
and the public debt ratio doubled in the last decade. The aim of this paper is to investigate the
fiscal sustainability of Macedonia using quarterly data for the period 2005 – 2016. We use a
VAR model to determine whether the primary balance responds positively to increases in
government indebtedness, thus ensuring fiscal sustainability, or is set exogenously and
independently from changes in government liabilities. The empirical analysis shows that the
primary balance lacks the necessary and sufficient positive response to an increase in the
government debt level that helps prevent a further debt accumulation. These results, together
with the drastically increased public debt since 2008, imply a need for a faster adjustment of
the primary balance after a government debt shock in order to prevent reaching even higher
debt levels and losing a valuable fiscal space
countries (especially in the European Union) due to rising debt levels and deterioration of their
fiscal space. The adverse effects of high indebtedness highlighted the importance of maintaining
sustainable public finances. This problem was not limited to rich and highly developed
economies. The Republic of Macedonia also experienced such developments in the fiscal area
and the public debt ratio doubled in the last decade. The aim of this paper is to investigate the
fiscal sustainability of Macedonia using quarterly data for the period 2005 – 2016. We use a
VAR model to determine whether the primary balance responds positively to increases in
government indebtedness, thus ensuring fiscal sustainability, or is set exogenously and
independently from changes in government liabilities. The empirical analysis shows that the
primary balance lacks the necessary and sufficient positive response to an increase in the
government debt level that helps prevent a further debt accumulation. These results, together
with the drastically increased public debt since 2008, imply a need for a faster adjustment of
the primary balance after a government debt shock in order to prevent reaching even higher
debt levels and losing a valuable fiscal space
Subjects
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