Abstract
Assessing non-linearities and heterogeneity in debt sustainability analysis: A panel spline approach
Highlights
With the 2008/2010 European debt crisis the interest in public debt sustainability analyses has revived
The relationship is empirically tested in a single equation linear regression model
Regarding the methodology for the empirical estimation, we resort to the penalized splines fixed effects estimator according to Puetz and Kneib (2016). Such additive semiparametric models have become increasingly popular in empirical works (Baltagi and Li, 2002)
Summary
With the 2008/2010 European debt crisis the interest in public debt sustainability analyses has revived. The current Covid-19 pandemic affecting countries around the world forces governments to react in order to protect the societies and to cushion the negative economic effects with the help of huge rescue and recovery programs that are mainly financed by issuing bonds. These policies affect both the current and the future budget as well. If a government reacts to a rise in the public debt ratio by actively adjusting its discretionary fiscal policy in terms of higher primary surpluses, the debt policy is considered to be sustainable. It seems to be necessary to resort to non-linear estimation techniques
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