To Establish Sustainability of Government Deficits: Methodology and Application

The purpose of this paper is to survey methodology of test for fiscal sustainability. The econometrical tests for fiscal sustainability have been improved since the 1980s. We introduce the methods and backgrounds of these tests. Also we apply the tests to the Indonesian and Japanese data. It is important to analyze the sustainability of government bonds consisting with the fiscal system, particularly intergovernmental relationship. Namely, we should investigate debt sustainability of the consolidated government including not only the central government but also local governments and other (off-budget) account of the central government. In the second half of this paper, we explain the Japanese fiscal policy from the viewpoint of the sustainability problem of government bond policy. *: Senior Economist of Policy Research Institute, Ministry of Finance, Japanese Government, and Associate Professor of Faculty of Economics, Keio University, E-mail: [email protected] This paper was prepared for and presented at the seminar held at the Central Bank of Republic of Indonesia (Bank Indonesia) and the National Development Planning Agency (Badan Perencanaan Pembangunan Nasional: BAPPENAS), in March 2003. Opinions expressed in this paper are those of the author and do not constitute the official position of the Ministry of Finance, the Japanese Government or the Policy Research Institute.