Assessing Fiscal Sustainability Under Uncertainty

34 Pages Posted: 29 Jan 2006

See all articles by Theodore Barnhill

Theodore Barnhill

George Washington University - Department of Finance

George Kopits

International Monetary Fund (IMF)

Date Written: April 2003

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: fiscal policy, Value-at-Risk analysis, vulnerability to crises, emerging markets

JEL Classification: D81, E62, F41, H63

Suggested Citation

Barnhill, Theodore and Kopits, George, Assessing Fiscal Sustainability Under Uncertainty (April 2003). IMF Working Paper, Vol. , pp. 1-34, 2003. Available at SSRN: https://ssrn.com/abstract=879155

Theodore Barnhill (Contact Author)

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

George Kopits

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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