Fiscal sustainability in Central and Latin American countries : evidence from a panel cointegration approach

This empirical study aims at assessing sustainability of fiscal policies in twenty Central and Latin American countriesover the period 1990-2012. We employ the second generation panel unit root test proposed by Pesaran (2007) to takeinto account for cross-section dependence and it is found that the fiscal variables are integrated of order one. Using the panel cointegration tests suggested by Westerlund (2007), econometric results show that there is a long-runrelationship between government revenue and spending. The estimate of the panel cointegrating regression in an error correction model indicates that the budget deficit turns out to be weakly sustainable.