Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach

By Oya Celasun, Xavier Debrun, Jonathan David Ostry

March 1, 2006

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Oya Celasun, Xavier Debrun, and Jonathan David Ostry. Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach, (USA: International Monetary Fund, 2006) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper proposes a probabilistic approach to public debt sustainability analysis (DSA) using "fan charts." These depict the magnitude of risks-upside and downside-surrounding public debt projections as a result of uncertain economic conditions and policies. We propose a simulation algorithm for the path of public debt under realistic shock configurations, combining pure economic disturbances (to growth, interest rates, and exchange rates), the endogenous policy response to these, and the possible shocks arising from fiscal policy itself. The paper emphasizes the role of fiscal behavior, as well as the structure of disturbances facing the economy and due to fiscal policy, in shaping the risk profile of public debt. Fan charts for debt are derived from the "marriage" between the pattern of shocks on the one hand and the endogenous response of fiscal policy on the other. Applications to Argentina, Brazil, Mexico, South Africa, and Turkey are used to illustrate the approach and its limitations.

Subject: Debt sustainability analysis, External debt, Fiscal policy, Fiscal stance, Output gap, Production, Public debt

Keywords: Africa, Baseline debt projection, Confidence interval, Debt path, Debt sustainability analysis, Debt sustainability assessment, Dummy variable, Exchange rate, Fan charts, Fiscal policy adjustment, Fiscal policy behavior, Fiscal policy process, Fiscal policy recommendation, Fiscal policy shock, Fiscal reaction function, Fiscal stance, Frequency distributions of the debt ratio, Junk bond, Output gap, Public debt sustainability, Reaction function, Risk analysis, Sensitivity analysis, Time horizon, WP

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/067
Stock No:

WPIEA2006067
ISBN:

9781451863277
ISSN:

1018-5941

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