International evidence on fiscal solvency: Is fiscal policy “responsible”?

We conduct a cross-country empirical analysis of fiscal solvency based on dynamic stochastic general equilibrium conditions. The results show evidence of fiscal solvency, in the form of a robust positive conditional response of the primary balance to changes in public debt, in panels for emerging and industrial economies and in a combined panel. Emerging economies show a stronger response and hence converge to lower mean debt–output ratios, as observed in the data. The results are weaker for countries with debt ratios exceeding panel means and medians. Hence, we can separate countries where fiscal solvency holds from those where it remains in doubt.