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Assessing Fiscal Sustainability Under Uncertainity

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  • Mr. Theodore M. Barnhill
  • Mr. George Kopits

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.

Suggested Citation

  • Mr. Theodore M. Barnhill & Mr. George Kopits, 2003. "Assessing Fiscal Sustainability Under Uncertainity," IMF Working Papers 2003/079, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/079
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    References listed on IDEAS

    as
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    6. Kopits, George, 2002. "Central European EU accession and Latin American integration: Mutual lessons in macroeconomic policy design," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 253-277, December.
    7. Easterly, William, 1999. "When is fiscal adjustment an illusion?," Policy Research Working Paper Series 2109, The World Bank.
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