Abstract:

The main objective of this study is to examine the public debt sustainability using a nonlinear model approach and a smooth transition autoregressive model (STAR), and based on quarterly data ranging from 1964 Q1 to 2016 Q1 on the Algerian public debt as a percentage of GDP. The results clearly show the existence of threshold effects in the Algerian public debt (nonlinear behavior and shift in fiscal policy regime) in the form of a Logistic model (LSTR) containing 2 regimes with one threshold, and depending on the sixth lag in oil price. Thus, the results support the active debt management hypothesis, when there is a deviation of the debt ratio from its equilibrium. Moreover, government authorities would intervene by cutting deficits and worsening debt only when they have reached a certain threshold (US $ 80.85 per barrel). On the other hand, nonlinear unit root tests accept the null hypothesis of the unit roots and reject the alternative hypothesis for the stationarity of the STAR nonlinear model. This means that the time series of public debt is not stationary (not mean reverting characteristic), and therefore cannot sustain the public debt in Algeria over the long term. However, the effect of a shock with the same magnitude, but with different sign, will not have a same effect on the speed of adjustment towards equilibrium. Moreover, the break dates coincides with the beginning of the sharp rise or a drop in oil prices, which confirm the results of the selection of transition variable in the nonlinear model.