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

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,
Mr. Xavier Debrun
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, and
Mr. Jonathan David Ostry
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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 067
Language:
English
Publication Date:
01 Mar 2006
DOI:
https://doi.org/10.5089/9781451863277.001
ISBN:
9781451863277
ISSN:
1018-5941
Pages:
54
Keywords:
WP; confidence interval; exchange rate; junk bond; dummy variable; sensitivity analysis; time horizon; Public debt sustainability; fiscal reaction function; risk analysis; fan charts; fiscal policy shock; reaction function; baseline debt projection; fiscal policy adjustment; debt sustainability assessment; debt path; fiscal policy recommendation; fiscal policy behavior; fiscal policy process; frequency distributions of the debt ratio; Fiscal stance; Debt sustainability analysis; Output gap; Africa
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund