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In light of the fact that most countries in the world have now started to consolidate their public finances and adopt some measure of fiscal prudence, it is inevitable that a considerable amount of growth will have to be sacrificed in the near term. Yet, this implicit assumption in some sense conforms to the Keynesian school of thought and essentially abstracts from other channels by which changes in fiscal stance can affect aggregate demand. This exercise is an attempt to investigate the possible non-Keynesian effects of fiscal adjustment, which may lead to scenarios such as that of 'expansionary fiscal contractions', or even 'contractionary fiscal expansions' among others. A small sample of developed countries is studied and a pooled GLS with fixed effects model is estimated to test for the existence of such effects. [ABSTRACT FROM AUTHOR]

The world is currently in the throes of a sovereign debt crisis, which in its enormity is comparable to the Latin American crisis, which occurred two decades ago. The situation currently seems to be less toxic than a few months back when it appeared as though a real impasse had been reached. This improvement is mostly on the back of extraordinary coordinated efforts undertaken by the EU as a whole in bailing out whole countries (eg Greece) and also a tacit, though rather late, acknowledgment of the fact that severe consolidation measures were on the cards if any of the peripheral economies were to survive. The paper analyses the fiscal health of the two distinct blocs, which make up the contours of the world now, viz. the developed and the emerging market economies. A sample of both these segments is studied and comment attempted on their relative vulnerability and their future debt trajectory. This issue assumes even greater significance in light of the fact that these countries are currently going through a very fragile economic phase and severe government contraction may have ramifications for recovery in the region. To better address this a fiscal vulnerability index is constructed and also use is made of interest rate-growth differentials to analyse the sustainability question. [ABSTRACT FROM AUTHOR]