Sustainability of Public Debt:An Analytical Framework

Sustainability is a term that has been used with increasing frequency in the academic literature and recent multilateral policy discussions. Taking note of the crises in different countries heading for a debt trap, it is necessary to look at the right combination of fiscal parameters and growth to achieve sustainability and stable development. Fiscal prudence involves exercise of good judgment, common sense and even caution in the conduct of fiscal policies, especially on the expenditure front. This paper deals with finding: (a) debt-GDP threshold which will support to find out at what threshold level there is nonlinear relationship between debt and GDP, (b) sustainability indicators which gives the overall depiction of the fiscal side which guides for fiscal prudence policies, and (c) Markov regime switching model which explains the relationship of debt and growth. The period of study is from 1980 to 2016 and it is with respect to the central government.