Non-linear effects of fiscal stimulus on fiscal sustainability Indicators in Turkey

Cem Cebi and K. Azim Ozdemir

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This study aims at investigating the non-linear effects of government spending shocks on fiscal sustainability indicators in Turkey for the period of 2001:q1 – 2020:q4. Using the local projection method and separating government spending into two main components, namely public consumption and public investment, we examine the effects of a fiscal stimulus shock on debt-to-GDP ratio, Treasury interest rates, CDS risk premiums, output and inflation under two different debt regimes. The debt regimes (high and low) are determined by a logistic transition function regarding with debt-to-GDP ratio. We find some evidence on state-dependent features of fiscal stimulus on macro variables (output and inflation) and fiscal sustainability indicators. Particularly, we conclude that the implementation of expansionary fiscal policy via an increase in government spending in a low-debt regime would help to improve fiscal sustainability as well as the effectiveness of the fiscal policy. On the other hand, an increase in government spending in a high-debt regime generally produces lower output gains and higher budgetary costs. As a result, this study highlights the fact that the timing of fiscal actions, accurate assessment of debt regimes and composition of government spending matters.Creation-Date: 2021

Keywords: Fiscal policy; Sustainability; Local projection; Non-Linear effects (search for similar items in EconPapers)
JEL-codes: C32 E62 H50 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2128

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