3.5 Government Revenue and Expenditure Adjustments to Debt
3.5(A) Government Revenue Adjustments to Debt
After analyzing debt dynamics, next step is to evaluate policy question that which component of fiscal policy
is adjusting against debt accumulation to make debt and fiscal policy sustainable. The objective of this step is
to investigate, whether revenues or expenditures or both are playing their role in making adjustments.
Revenue-to-GDP ratio is regressed on lag public debt and an output gap. The results indicate that adjustments
come from revenue side.