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Structural Breaks, Unit Roots, and Cointegration: A Further Test of the Sustainability of the Indian Fiscal Deficit

The Australian National University

Anurag Sharma

The Australian National University

If public expenditure and public revenue are I (0), public debt is sustainable, but if these are I (1) and not cointegrated or have a cointegrating vector different from [1, -1], the public debt is said to be unsustainable. Extant work indicates that India’s public debt is unsustainable. The authors reinvestigate this issue by allowing for endogenous structural breaks for two data sets—the British period from 1871-1921 and the postindependence period from 1950-1997. Revenue and expenditure series are I (1) and cointegrated with regime shifts. Hence, Indian public debt may not be unsustainable.

Key Words: structural break • unit root • public finance • revenue • expenditure

Public Finance Review, Vol. 32, No. 2, 196-219 (2004)
DOI: 10.1177/1091142103260858


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