Fiscal regimes and debt sustainability in Colombia

Abstract

ABSTRACT This paper evaluates Colombia’s debt sustainability for the period 1980–2021, using a nonlinear fiscal reaction function approach. We employ a Markov-Switching model with annual data to identify sustainable and unsustainable fiscal regimes. According to this model, we identified an unsustainable fiscal regime during three periods with an average duration of six years − 1980–1985, 1993–1999, and 2015–2021 – while the other periods are identified as a sustainable regime. Although we find evidence of asymmetric behaviour in fiscal responses and the presence of pro-cyclical fiscal policy, Colombia’s long-term fiscal sustainability is verified based on a globally-based fiscal sustainability test. In this context, the government reacts appropriately to increases in debt only in the sustainable regime, but the fiscal response is sufficiently robust to stabilise public debt throughout the entire period. Finally, we also highlight concerns regarding the current state of the global economy, particularly due to an inflationary trend and escalating interest rates, which can compromise long-term fiscal sustainability.