THE DEBT AND FISCAL NEXUS IN BARBADOS: A FISCAL POLICY REACTION ANALYSIS

Author(s): LACORBINIéRE, JASON; (2011)

Created 25 Jul, 2011
Categories Working Papers
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The sustainability of public debt in Barbados has received significant and increasing attention over the past decade. Most of the research in this area has focused on the sustainability of Central Government debt as indicated by various thresholds and co-integration analyses of revenue and expenditure. These papers have found, in general, that Central Government debt is on a sustainable path. However, much less empirical investigation has been applied to the explicit fiscal policy responses to rising debt. This paper therefore tests whether government’s fiscal policy responds to changes in the level of debt. More specifically, given the unique risks associated with privately-held debt, we investigate whether Barbados’ fiscal policy systematically responds to changes in Net General Government Debt. Using a dynamic co-integration framework, we find support for the notion that Barbados’ fiscal position has been sustainable.

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