FISCAL REACTION FUNCTION IN MEXICO: A STRUCTURAL CHANGE ANALYSIS

T he sustainability of fiscal policy as it is applied in Mexico is examined by estimating a fiscal reaction function that considers the presence of structural change. A positive response by public debt in the fiscal balance would indicate stationarity in the debt/GDP relationship, thereby demonstrating that fiscal policy is sustainable. Yet this relationship is affected by the presence of structural change, accounted for by estimations undertaken by the Bai and Perron procedure (1998; 2003) and the Kalman Filter estimation. Results point to a fiscal policy that is not compatible with the intertemporal budget constraint and also exhibits fiscal unsustainability. Under the current conditions of fiscal policy, characterized by fiscal-revenue weakness, the federal government cannot use public debt permanently as a way of jump-starting the economy.