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Quantitative approaches to fiscal sustainability analysis
A Incorporating User-Defined Stress Tests
B Stochastic Simulations
C Fiscal Reaction Functions
3 Fiscal Deficits, Inflation and Sustainability of Public Debt in Turkey
Figure 1.a. Rate of inflation (80- 05) b. Public debt to GDP ratio (1990-2005)
3.1 Baseline Scenario for Public Debt Dynamics
3.2. An application of stress tests: on the credibility of the baseline scenario
3.3. Steady State Consistency between Fiscal and Monetary Policy
Figure 3 Seigniorage Revenues and Inflation in Turkey.
Then, the FS tool calculates the rdr, the fiscal consistency measure, for the base case, historical and country-specific alternative scenario, using the last year of the projection period as a base year for the application of the steady state consistency approach. The FS tool also plots the rdr, for various inflation rates, for the base case, historical and country-specific alternative scenarios (see Figure 4). The rdr, estimated for the base line scenario assumes that large primary surplus as of 2005 is to
3.5. The stochastic simulations approach
3.6. Fiscal Policy Response to Shocks
4 Conclusions
This paper presents the analytical framework that underpins the fiscal sustainability tool and applies this tool to the case of Turkey. While Turkey is an interesting example on its own right, many issues that are familiar from other countries show up here too, making the case of wider interest.
Despite its long history of high and volatile inflation, Turkey has succeeded in bringing about a dramatic reduction in inflation since 2001. Similarly, following the devastating 2001 financial crisis, public debt ratio has been declining rapidly reaching 61.2 percent of GNP by end-2005, compared with 89.5 percent in 2001. Public debt composition has also improved significantly, with the share of foreign currency denominated debt falling from 40 to 28 percent of total public debt during 2001-2005.
The results suggest that if continued, the size and duration of the recent fiscal adjustment has been such that it will trigger a rapid decline in public debt (as a share of GDP) over the projection period. The issue of inconsistency between fiscal policy and inflation targets, given stable debt ratios at the end of the projection period, can be safely set aside. The proviso about sustaining the fiscal adjustment may be a serious one however, possibly explaining the stubbornly high premium Turkey still (in
Appendix 1 Estimation of a VAR system for key debt determinants for Turkey
Appendix 2 Estimating Fiscal Reaction Function
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Quantitative approaches to fiscal sustainability analysis : a new World Bank tool applied to Turkey / Nina Budina; Sweder van Wijnbergen
Place and Date of Creation
Washington
2007
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