Probabilistic Sustainability of Public Debt: A Vector Autoregression Approach for Brazil, Mexico, and Turkey

Evan Tanner and Issouf Samaké

No 2006/295, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the sustainability of fiscal policy under uncertainty in three emerging market countries, Brazil, Mexico, and Turkey. For each country, we estimate a vector autoregression (VAR) that includes fiscal and macroeconomic variables. Retrospectively, a historical decomposition shows by how much debt accumulation reflects unsustainable policy, adverse shocks, or both. Prospectively, Monte Carlo techniques reveal the primary surplus that is required to keep the debt/GDP ratio from rising in all but the worst 50 percent, 25 percent, and 10 percent of circumstances. Such a value-at-risk approach presents a clearer menu of policy options than currently used frameworks.

Keywords: WP; time horizon; exchange rate; Tax smoothing; Sustainability; Vector Autoregression; Historical Decomposition; Primary Surplus; GDP ratio; GDP p; GDP growth; deficit shock; Fiscal sustainability; Exchange rates; Real interest rates; Global (search for similar items in EconPapers)
Pages: 42
Date: 2006-12-01
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Citations: View citations in EconPapers (19)

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