Debt sustainability, structural breaks and non-linear fiscal adjustment: A testing application to Greek fiscal policy

Abstract

Non-linear public debt adjustment and structural breaks in fiscal policy may affect tests of public debt sustainability. Existing studies address these issues separately. No study has considered both. We address this gap by focusing on Greece, one of the most highly-indebted EMU countries. We find evidence of previously undetected non-linear fiscal adjustment; and two structural breaks in fiscal policy. Excluding these from the analysis, or allowing for non-linearities only, affects the nature of the empirical findings. Accounting for both, we find Greek public debt to be sustainable. This is in contrast to the findings of previous studies on Greece.