Probabilistic Sustainability of Public Debt: A Vector Autoregression Approach for Brazil, Mexico, and Turkey
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Summary:
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.
Series:
Working Paper No. 2006/295
Subject:
Exchange rates Financial services Fiscal policy Fiscal sustainability Foreign exchange Public debt Real interest rates
English
Publication Date:
December 1, 2006
ISBN/ISSN:
9781451865554/1018-5941
Stock No:
WPIEA2006295
Pages:
42
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