Fiscal Sustainability in Emerging Markets: Panel Unit Root Approach with Smooth Structural Shifts and Common Factors

Öz

We test the fiscal sustainability in emerging markets (EMs) for a period of nearly half a century (1970-2022) using the panel unit root approach with common factors and Fourier breaks through the government budget balance. We also provide an opportunity for comparison by applying a method that considers sharp-type breaks under common factors. The outcomes of the sharp-type break test report that the budget structure in EMs is unsustainable at both the panel and cross-sectional levels. On the contrary, evidence from the Fourier break test confirms fiscal sustainability at the panel level and for six countries (Indonesia, Peru, the Philippines, South Africa, Thailand, and Türkiye). The paper advocates that in samples such as EMs with many breaks, sharp-break approaches are inadequate to explain the data structure. These differing analysis findings highlight that Fourier break approaches are strong candidates to fill this gap in the empirical literature. Lastly, the paper offers policy recommendations based on the findings generated by the new approach.

Anahtar Kelimeler

• Fiscal Sustainability
• Emerging Markets
• Fourier Shifts
• Common Factors
• Panel Unit Root

Gelişmekte Olan Piyasalarda Mali Sürdürülebilirlik: Yumuşak Yapısal Değişimler ve Ortak Faktörler ile Panel Birim Kök Yaklaşımı

Öz

Gelişmekte olan ülkelerde (GOÜ) mali sürdürülebilirliği hükümet bütçe dengesi üzerinden, yaklaşık yarım asırlık bir dönem (1970-2022) için, ortak faktörler ve Fourier kırılmaları içeren panel birim kök yaklaşımıyla test ediyoruz. Ayrıca, ortak faktörler altında keskin tip kırılmaları dikkate alan bir yöntem uygulayarak karşılaştırma imkanı sağlıyoruz. Keskin tip kırılma testinin sonuçları, GOÜ'lerde bütçe yapısının hem panel hem de yatay kesit düzeyinde sürdürülemez olduğunu ortaya koymaktadır. Buna karşın, Fourier kırılma testi, panel düzeyinde ve altı ülke (Endonezya, Peru, Filipinler, G. Afrika, Tayland ve Türkiye) için mali sürdürülebilirliği doğrulamaktadır. Çalışma, GOÜ gibi çok sayıda kırılmanın olduğu örneklerde, keskin kırılma yaklaşımlarının veri yapısını açıklamada yetersiz kaldığını savunmaktadır. Farklı analiz bulguları, Fourier kırılma yaklaşımlarının ampirik literatürdeki bu boşluğu doldurmak için güçlü adaylar olduğunu vurgulamaktadır. Son olarak, makale yeni yaklaşımla elde edilen bulgulara dayalı politika önerileri sunmaktadır.

Anahtar Kelimeler

• Mali Sürdürülebilirlik
• Gelişmekte Olan Piyasalar
• Fourier Kırılımlar
• Ortak Faktörler
• Panel Birim Kök

Kaynakça

1. Adams, C., Ferrarini, B. and Park, D. (2010). Fiscal sustainability in developing Asia (Asian Development Bank Economics Working Paper Series No. 205). Retrieved from https://www.adb.org/sites/default/files/publication/28414/economics-wp205.pdf
2. Adrison, V. (2024). Fiscal sustainability in Indonesia: Policies and progress. Asian Economic Policy Review, 19(2), 224-247. https://doi.org/10.1111/aepr.12468 Afonso, A. (2005). Fiscal sustainability: The unpleasant European case. FinanzArchiv/Public Finance Analysis, 61(1), 19-44. https://doi.org/10.1628/0015221053722532
3. Afonso, A. and Alves, J. (2023). Does government spending efficiency improve fiscal sustainability? European Journal of Political Economy, Advance online publication, 102403. https://doi.org/10.1016/j.ejpoleco.2023.102403
4. Afonso, A. and Coelho, J.C. (2024). Drivers of fiscal sustainability: A time-varying analysis for Portugal. International Economics, 178, 100486. https://doi.org/10.1016/j.inteco.2024.100486
5. Afonso, A. and Jalles, J.T. (2012). Revisiting fiscal sustainability: Panel cointagration and structural breaks in OECD countries (European Central Bank Working Paper Series No. 1465). http://dx.doi.org/10.2139/ssrn.2180575
6. Afonso, A. and Jalles, J.T. (2014). A longer-run perspective on fiscal sustainability. Empirica, 41, 821-847. https://doi.org/10.1007/s10663-013-9240-0
7. Afonso, A. and Jalles, J.T. (2015). Fiscal sustainability: A panel assessment for advanced economies. Applied Economics Letters, 22(11), 925-929. https://doi.org/10.1080/13504851.2014.987913
8. Afonso, A. and Jalles, J.T. (2016). The elusive character of fiscal sustainability. Applied Economics, 48(28), 2651-2664. https://doi.org/10.1080/00036846.2015.1128074

9. Afonso, A. and Rault, C. (2010). What do we really know about fiscal sustainability in the EU? A panel data diagnostic. Review of World Economics, 145, 731-755. https://doi.org/10.1007/s10290-009-0034-1
10. Al Sayed, O., Samir, A. and Anwar, H.H. (2021). Assessing fiscal sustainability in Egypt: A comparative study. Review of Economics and Political Science, 6(4), 292-310. https://doi.org/10.1108/REPS-02-2020-0020
11. Apergis, N. (2015). Public debt sustainability: Evidence from EU countries under fiscal consolidation and non-linear unit root tests. Economics and Business Letters, 4(4), 131-136. https://doi.org/10.17811/ebl.4.4.2015.131-136
12. Arestis, P., Cipollini, A. and Fattouh, B. (2004). Threshold effects in the U.S. budget deficit. Economic Inquiry, 42(2), 214-222. https://doi.org/10.1093/ei/cbh055
13. Baharumshah, A.Z., Soon, S.V. and Lau, E. (2017). Fiscal sustainability in an emerging market economy: When does public debt turn bad? Journal of Policy Modeling, 39(1), 99-113. https://doi.org/10.1016/j.jpolmod.2016.11.002
14. Bai, J. and Carrion-I-Silvestre, J.L. (2009). Structural changes, common stochastic trends, and unit roots in panel data. The Review of Economic Studies, 76(2), 471-501. https://doi.org/10.1111/j.1467-937X.2008.00530.x
15. Baltagi, B. (2008). Econometric analysis of panel data. London: John Wiley & Sons.
16. Boengiu, T., Triandafil, C.M. and Triandafil, A.M. (2011). Debt ceiling and external debt sustainability in Romania: A quantile autoregression model. Romanian Journal of Economic Forecasting, 4, 15-29. Retrieved from https://ipe.ro/new/
17. Brady, G.L. and Magazzino, C. (2018). Fiscal sustainability in the EU. Atlantic Economic Journal, 46, 297-311. https://doi.org/10.1007/s11293-018-9588-4
18. Campos, E.L. and Cysne, R.P. (2020). Sustainability of Brazilian public debt: A structural break analysis. International Journal of Emerging Markets, 17(3), 645-663. https://doi.org/10.1108/IJOEM-11-2019-0936
19. Chapman, J.I. (2008). State and local fiscal sustainability: The challenges. Public Administration Review, 68, 115-131. https://doi.org/10.1111/j.1540-6210.2008.00983.x
20. Chekouri, S.M., Chibi, A. and Benbouziane, M. (2024). Public debt dynamics and fiscal sustainability in selected Nort African countries: New evidence from recurrent explosive behavior tests and quantile unit root analysis. Economic Change and Restructuring, 57(38), 1-27. https://doi.org/10.1007/s10644-024-09625-w
21. Chen, P.F. (2016). US fiscal sustainability and the causality relationship between government expenditures and revenues: A new approach based on quantile cointegration. Fiscal Studies, 37(2), 301-320. https://doi.org/10.1111/j.1475-5890.2015.12053
22. Chen, S.W. (2014). Testing for fiscal sustainability: New evidence from the G-7 and some European countries. Economic Modelling, 37, 1-15. https://doi.org/10.1016/j.econmod.2013.10.024
23. Chibi, A., Chekouri, S.M. and Benbouziane, M. (2019). Debt sustainability, structural breaks and nonlinear fiscal adjustment: Empirical evidence from Algeria. International Review of Economics, 66(4), 369-397. https://doi.org/10.1007/s12232-019-00327-8
24. Christopoulos, D.K. and León-Ledesma, M.A. (2010). Smooth breaks and non-linear mean reversion: Post-Bretton Woods real exchange rates. Journal of International Money and Finance, 29(6), 1076-1093. https://doi.org/10.1016/j.jimonfin.2010.02.003
25. Cipollini, A. (2001). Testing for government intertemporal solvency: A smooth transition error correction model approach. The Manchester School, 69(6), 643-655. https://doi.org/10.1111/1467-9957.00275
26. Collignon, S. (2012). Fiscal policy rules and the sustainability of public debt in Europe. International Economic Review, 53(2), 539-567. https://doi.org/10.1111/j.1468-2354.2012.00691.x
27. Cuestas, J.C. and Regis, P.J. (2018). On the dynamics of sovereign debt in China: Sustainability and structural change. Economic Modelling, 68, 356-359. https://doi.org/10.1016/j.econmod.2017.08.003
28. Deheri, A. and Nag, A. (2023). Assessing the long-run sustainability of public debt and fiscal deficit in India. Global Journal of Emerging Market Economies, 15(3), 313-329. https://doi.org/10.1177/09749101221113881
29. Enders, W. and Lee, J. (2012). A unit root test using a Fourier series to approximate smooth breaks. Oxford Bulletin of Economics and Statistics, 74(4), 574-599. https://doi.org/10.1111/j.1468-0084.2011.00662.x
30. European Commission. (2024). Convergence criteria for joining. Retrieved from https://economy-finance.ec.europa.eu/euro/enlargement-euro-area/convergence-criteria-joining_en
31. Feve, P. and Henin, P.Y. (2000). Assessing effective sustainability of fiscal policy within the G-7. Oxford Bulleting of Economics and Statistics, 62(2), 175-195. https://doi.org/10.1111/1468-0084.00167
32. Getzner, M., Glatzer, E. and Neck, R. (2001). On the sustainability of Austrian budgetary policies. Empirica, 28, 21-40. https://doi.org/10.1023/A:1010927632670
33. Ghatak, S. and Sanchez-Fung, J.R. (2007). Is fiscal policy sustainable in developing economies? Review of Development Economics, 11(3), 518-530. https://doi.org/10.1111/j.1467-9361.2006.00358.x
34. Goyal, R., Khundrakpam, J.K. and Ray, P. (2004). Is India’s public finance unsustainable? Or, are the claims exaggerated? Journal of Policy Modeling, 26(3), 401-420. https://doi.org/10.1016/j.jpolmod.2004.03.004
35. Hakkio, C.S. and Rush, M. (1991). Is the budget deficit “too large?”. Economic Inquiry, 29(3), 429-445. https://doi.org/10.1111/j.1465-7295.1991.tb00837.x
36. Hamilton, J.D. and Flavin, M. (1986). On the limitations of government borrowing: A framework for empirical testing. American Economic Review, 76(4), 809-819. https://doi.org/10.3386/w1632
37. IMF. (2024a). World economic outlook database [Dataset]. Retrieved from https://www.imf.org/en/Publications/WEO/weo-database/2024/April
38. IMF. (2024b). Public finances in modern history [Dataset]. Retrieved from https://www.imf.org/external/datamapper/datasets/FPP
39. Jarque, C.M. and Bera, A.K. (1987). A test for normality of observations and regression residuals. International Statistical Review, 55(2), 163-172. https://doi.org/10.2307/1403192
40. Kremers, J.J. (1989). US federal indebtedness and the conduct of fiscal policy. Journal of Monetary Economics, 23(2), 219-238. https://doi.org/10.1016/0304-3932(89)90049-4
41. Lusinyan, L. and Thornton, J. (2009). The sustainability of South African fiscal policy: An historical perspective. Applied Economics, 41(7), 859-868. https://doi.org/10.1080/00036840701604537
42. Magazzino, C., Brady, G.L. and Forte, F. (2019). A panel data analysis of the fiscal sustainability of G-7 countries. The Journal of Economic Asymmetries, 20, e00127. https://doi.org/10.1016/j.jeca.2019.e0012
43. Makrydakis, S., Tzavalis, E. and Balfoussias, A. (1999). Policy regime changes and the long-run sustainability of fiscal policy: An application to Greece. Economic Modelling, 16(1), 71-86. https://doi.org/10.1016/S0264-9993(98)00026-1
44. Marks, S.V. (2004). Fiscal sustainability and solvency: Theory and recent experience in Indonesia. Bulletin of Indonesian Economic Studies, 40(2), 227-242. https://doi.org/10.1080/0007491042000205295
45. Nazlioglu, S., Lee, J., Tieslau, M., Karul, C. and You, Y. (2023). Smooth structural changes and common factors in nonstationary panel data: An analysis of healthcare expenditures. Econometric Reviews, 42(1), 78-97. https://doi.org/10.1080/07474938.2022.2156740
46. Polat, G.E. and Polat, O. (2021). Fiscal sustainability analysis in EU countries: A dynamic macro-panel approach. Eastern Journal of European Studies, 12(1), 219-241. https://doi.org/10.47743/ejes-2021-0109
47. Quintos, C.E. (1995). Sustainability of the deficit process with structural shifts. Journal of Business & Economic Statistics, 13(4), 409-417. https://doi.org/10.1080/07350015.1995.10524615
48. Rajakaruna, I. and Suardi, S. (2022). Fiscal sustainability, fiscal debt and economic growth in the South Asian region. The Journal of Developing Areas, 56(1), 249-265. https://doi.org/10.1353/jda.2022.0001
49. Saadaoui, J., Lau, C.K.M. and Cai, Y. (2024). Testing fiscal sustainability in OECD countries: New evidence from the past centuries. Applied Economics Letters, 31(7), 676-682. https://doi.org/10.1080/13504851.2022.2142502
50. Sayed, O.A., Samir, A. and Anwar, H.H. (2021). Assessing fiscal sustainability in Egypt: A comparative study. Review of Economics and Political Science, 6(4), 292-310. https://doi.org/10.1108/REPS-02-2020-0020
51. Sen, H., Sagbas, I. and Keskin, A. (2010). Analysing fiscal sustainability in Turkey: 1975-2007. Journal of Public Finance, 158, 103-123. Retrieved from https://www.hmb.gov.tr/
52. Shah, S.S.A., Afridi, M.A., Luo, L. and Taşkın, D. (2025). Fiscal resilience or vulnerability? Assessing public debt sustainability in the developing countries during 1996-2020. Journal of the Knowledge Economy, 16, 8983-9017. https://doi.org/10.1007/s13132-024-02251-x
53. Trehan, B. and Walsh, C.E. (1988). Common trends, the government's budget constraint, and revenue smoothing. Journal of Economic Dynamics and Control, 12(2-3), 425-444. https://doi.org/10.1016/0165-1889(88)90048-6
54. Trehan, B. and Walsh, C.E. (1991). Testing intertemporal budget constraints: Theory and applications to US federal budget and current account deficits. Journal of Money, Credit and Banking, 23(2), 206-223. https://doi.org/10.2307/1992777
55. UN. (2024). Department of economic and social affairs. Retrieved from https://sdgs.un.org/goals
56. Vanhorebeek, F. and Van Rompuy, P. (1995). Solvency and sustainability of fiscal policies in the EU. De Economist, 143(4), 457-473. https://doi.org/10.1007/BF01384910
57. Wang, L. (2022). Research on the impact of energy price fluctuations on regional economic development based on panel data model. Resources Policy, 75, 102484. https://doi.org/10.1016/j.resourpol.2021.102484
58. Westerlund, J. and Prohl, S. (2010). Panel cointegration tests of the sustainability hypothesis in rich OECD countries. Applied Economics, 42(11), 1355-1364. https://doi.org/10.1080/00036840701721323
59. WGI. (2024). Worldwide governance indicators [Dataset]. Retrieved from https://www.worldbank.org/en/publication/worldwide-governance-indicators
60. Wilcox, D.W. (1989). The sustainability of government deficits: Implications of the present-value borrowing constraint. Journal of Money, Credit and Banking, 21(3), 291-306. https://doi.org/10.2307/1992415
61. Wooldridge, J.M. (2010). Econometric analysis of cross section and panel data. Cambridge: The MIT Press.
62. World Bank. (2024). World development indicators [Dataset]. Retrieved from https://databank.worldbank.org/source/world-development-indicators
63. Yavuz, E., Kilic, E., Kar, A. and Pazarci, S. (2023). How effective is the asymmetric structure on the pathway to fiscal sustainability? Rethinking on Türkiye. Journal of Public Finance, 185, 97-124. Retrieved from https://www.hmb.gov.tr/