Assessing Fiscal Sustainability in Ukraine: TVP and VAR/VEC Approaches
Assessing Fiscal Sustainability in Ukraine: TVP and VAR/VEC Approaches

Summary/Abstract: Objective: The purpose of this article is to investigate fiscal sustainability in Ukraine, using quarterly data sample for the period between 2000 and 2016, in accordance with a recursive algorithm derived from the law of motion of the debt-to-GDP ratio developed by Croce and Juan-Ramon (2003). Research Design & Methods: An assessment of fiscal sustainability in Ukraine is provided according to a recursive algorithm derived from the law of motion of the debtto-GDP ratio, developed by Croce and Juan-Ramon (2003). Both time-varying parameters (TVP) and vector error-correction autoregression (VAR/VEC) models are used. Findings: It is found that there is causality running from the budget surplus to the gap between real interest rate and GDP growth rate, however it is not sufficient to guarantee a sustainable debt to GDP ratio. Implications & Recommendations: Our findings argue in favour of fiscal policy actions aimed at an increase in the government revenues, combined with the public sector expenditure cuts, as current policies do not seem to be sufficient to achieve fiscal sustainability. A more detailed study is needed in order to identify most efficient approaches for a decrease in the budget deficit across a detailed ‘menu’ of expenditure and revenues. Any attempts to decrease interest rate and/or stimulate output growth by an expansionary monetary stance are likely to be counterproductive in the presence of substantial public external debt. Contribution & Value Added: This empirical study provides an indication of the possibility of default on foreign public debt liabilities in Ukraine.

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