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

54 Pages Posted: 26 Apr 2006

See all articles by Oya Celasun

Oya Celasun

International Monetary Fund (IMF) - Research Department

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Jonathan D. Ostry

International Monetary Fund (IMF)

Date Written: March 2006

Abstract

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.

Keywords: Public debt sustainability, fiscal reaction function, risk analysis, fan charts

JEL Classification: H62, H63, C15, E62

Suggested Citation

Celasun, Oya and Debrun, Xavier and Ostry, Jonathan D., Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A 'Fan-Chart' Approach (March 2006). IMF Working Paper No. 06/67, Available at SSRN: https://ssrn.com/abstract=898728

Oya Celasun (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Xavier Debrun

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8321 (Phone)
202-623-6343 (Fax)

Jonathan D. Ostry

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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