Fiscal vulnerability to crises with perspective of consolidation: Cross-country analysis

This study investigates fiscal vulnerability to crisis with perspective of fiscal consolidation by utilising Threshold and Quantile regression methods. We conduct stability analysis (forward, backward and moving screening) along with public debt overhang and financial net worth approaches in Value at Risk (VaR) and Conditional Value at Risk (CVaR) using data from 1960 to 2014 for a range of 53 selected economies. We find results in favour of fiscal consolidation as a policy response to avoid fiscal vulnerability to crisis unlike widely believed 90 per cent benchmark of public debt to GDP ratio. Further results indicate lack of single benchmark of public debt to GDP across all selected countries. Interestingly different countries appear with different optimal values (ranging from 61 to 88 %) of public debt to GDP which may trigger vulnerability to crisis. This study contributes in the existing literature mainly in two ways i) introduces new dimension of fiscal consolidation as a policy response in relevance with fiscal crisis and ii) uses threshold and quantile regressions as the appropriate methods of estimation.