Fiscal regimes and fiscal sustainability in Sri Lanka

Chew Lian Chua, Nelson Perera, Sandy Suardi

Research output: Journal PublicationArticlepeer-review

2 Citations (Scopus)


This paper employs the regime-switching model-based fiscal sustainability test which relaxes the linear fiscal reaction function approach. There is evidence of a regime-switching fiscal rule in Sri Lanka for the period 1961–2017. Non-sustainable fiscal regime is identified only in two periods–1978-1983 and 1986-1990–while the other periods are defined by sustainable regimes. By considering the regime-specific feedback coefficients of the fiscal policy rule and the average durations of fiscal regimes, we find that Sri Lanka’s fiscal policy satisfies the No-Ponzi game condition. Nevertheless, the country’s long-term fiscal sustainability is in question given that the stricter debt-stabilizing condition is violated. Our results pose concerns for the credibility of adopting an inflation targeting framework in the absence of long-term fiscal sustainability.

Original languageEnglish
Pages (from-to)2384-2397
Number of pages14
JournalApplied Economics
Issue number21
Publication statusPublished - 3 May 2021


  • Fiscal rules
  • Markov-switching models
  • fiscal regimes
  • public debt sustainability
  • time-varying parameters

ASJC Scopus subject areas

  • Economics and Econometrics


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