This paper investigates the relationship between fiscal policy and sovereign debt in Belize, with a focus on government spending and the output gap. Using two models, the primary balance model and the government spending model, the study estimates the impact of changes in fiscal policy and government spending on Belize's sovereign debt level, while considering the effect of the output gap on fiscal policy and debt. The paper also employs a Vector Auto Regression (VAR) model to analyze the impact of shocks in debt-to-GDP ratio and real effective exchange rate (REER) on the output gap. The findings offer insights into the factors influencing Belize's debt levels and suggest the importance of managing debt levels to ensure sustainable fiscal policies and economic growth.

1 Introduction 1
2 Literature Review 5
2.1 Fiscal policy and Sovereign Debt 5
2.2 Government Spending and Sovereign Debt 5
2.3 Output gap and sovereign debt 6
2.4 Debt shocks and REER 6
3 Data and Model 9
3.1 Data Description 9
3.2 Methodology 10
3.3 Limitations and Assumptions of Models 11
4 Econometric Methods 11
4.1 Vector autoregression (VAR) 11
4.2 IRF of VAR Model 13
4.3 VAD of VAR Model 13
5 Results 15
5.1 Results from Primary Balance and Government Spending Model 15
5.2 Results of IRF Analysis on Output Gap and Debt-to-GDP Ratio 16
5.3 Results of IRF Analysis on Output Gap and Primary Balance 18
5.4 Results of IRF Analysis and VAD on Output Gap and REER 19
6 Conclusion 23
A Appendix 27

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