What does this research mean for the field?

In energy-dependent economies, accumulated foreign exchange reserves weaken fiscal discipline—a phenomenon termed the 'reserve cushion illusion'—and there is no stabilizing long-run fiscal response to rising public debt once energy-related effects are isolated. Novelty: ClaimNovelty.NOVEL_FINDING. Consensus alignment: ConsensusAlignment.NEUTRAL.

What question did this study set out to answer?

To investigate whether fiscal policy stabilizes public debt in energy-dependent economies once energy-related distortions are removed, and to test for a reserve cushion illusion where foreign exchange buffers weaken fiscal discipline.

September 2, 2026International Journal of Development Issues

A non-energy fiscal reaction function and the reserve cushion illusion

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Authors

ARAkeem Rahaman

Discussion

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Overview

Econometric analysis reveals that foreign exchange reserves weaken fiscal discipline in energy-dependent economies, suggesting conventional indicators overstate public debt sustainability.

Key Points

To investigate whether fiscal policy stabilizes public debt in energy-dependent economies once energy-related distortions are removed, and to test for a reserve cushion illusion where foreign exchange buffers weaken fiscal discipline.
Analyzed annual time-series data from Trinidad and Tobago covering the period from 1991 to 2024.
Estimated an augmented fiscal reaction function using an autoregressive distributed lag (ARDL) modeling framework incorporating the non-energy primary balance, non-energy output gap, and official foreign exchange reserves.
No evidence of a stabilizing long-run fiscal response to rising public debt was detected, with short-run debt increases linking to fiscal deterioration rather than consolidation.
Official foreign exchange reserves were negatively associated with the non-energy fiscal position, confirming the presence of a reserve cushion illusion.

Cite This Study

Akeem Rahaman (2026) studied this question.

synapsesocial.com/papers/6a97e2f6c562ede874ec761c https://doi.org/10.1108/ijdi-01-2026-0024

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September 2, 2026International Journal of Development Issues

A non-energy fiscal reaction function and the reserve cushion illusion

View Full Paper

Ask AI

Bookmark

Authors

ARAkeem Rahaman

Discussion

Member takes

Overview

Econometric analysis reveals that foreign exchange reserves weaken fiscal discipline in energy-dependent economies, suggesting conventional indicators overstate public debt sustainability.

Key Points

To investigate whether fiscal policy stabilizes public debt in energy-dependent economies once energy-related distortions are removed, and to test for a reserve cushion illusion where foreign exchange buffers weaken fiscal discipline.
Analyzed annual time-series data from Trinidad and Tobago covering the period from 1991 to 2024.
Estimated an augmented fiscal reaction function using an autoregressive distributed lag (ARDL) modeling framework incorporating the non-energy primary balance, non-energy output gap, and official foreign exchange reserves.
No evidence of a stabilizing long-run fiscal response to rising public debt was detected, with short-run debt increases linking to fiscal deterioration rather than consolidation.
Official foreign exchange reserves were negatively associated with the non-energy fiscal position, confirming the presence of a reserve cushion illusion.

Cite This Study

Akeem Rahaman (2026) studied this question.

synapsesocial.com/papers/6a97e2f6c562ede874ec761c https://doi.org/10.1108/ijdi-01-2026-0024

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