Assessing Fiscal Sustainability Under Uncertainity

Theodore Barnhill and George Kopits

No 2003/079, IMF Working Papers from International Monetary Fund

Abstract: Unlike conventional fiscal sustainability assessments, the Value-at-Risk approach developed in this paper explicitly captures the contribution of key risk variables to public sector vulnerability. In an illustrative application to Ecuador, the VaR approach confirms a significant risk of government financial failure stemming from the volatility and comovements of the exchange rate, interest rates, oil prices, and output. Although dollarization has helped attenuate fiscal vulnerability, the volatility of sovereign spreads and of oil prices remain major sources of risk for Ecuador's public sector. The paper concludes with a discussion of policy implications, an evaluation of the methodology, and suggestions for future research.

Keywords: WP; balance sheet; present value; exchange rate; fiscal policy; Value-at-Risk analysis; vulnerability to crises; emerging markets; risk variable; mean reversion; price level; term structure; oil price volatility; present-value terms; interest yield; estimating default risk; assumed oil price development; risk measurement; oil price development; price deviation; Public sector; Fiscal sustainability; Vector autoregression; Fiscal stance; Financial statements (search for similar items in EconPapers)
Pages: 34
Date: 2003-04-01
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Citations: View citations in EconPapers (31)

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