Decomposing Fiscal Multiplier Asymmetry Under Sovereign Debt Overhang: A Threshold VAR Approach for Emerging Market Economies

Abstract

Fiscal multipliers in emerging market economies exhibit pronounced asymmetric behavior contingent upon prevailing sovereign debt-to-GDP thresholds, yet the structural mechanisms driving this non-linearity remain insufficiently quantified. This study employs a Threshold Vector Autoregression (TVAR) framework calibrated against quarterly panel data from 34 emerging markets spanning 2000–2023 to decompose state-dependent fiscal multipliers across high- and low-debt regimes. Incorporating time-varying country risk premia and capital flow volatility as endogenous transmission channels, we identify a statistically significant fiscal multiplier compression of 0.61 units in high-debt states relative to low-debt benchmarks. Our findings further reveal that exchange rate flexibility and monetary policy credibility act as critical moderating variables, attenuating contractionary fiscal dynamics. The results carry substantive policy implications for debt consolidation sequencing in post-pandemic fiscal adjustment programmes.