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

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Listed:
  • Oya Celasun
  • Mr. Xavier Debrun
  • Mr. Jonathan David Ostry

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.

Suggested Citation

  • Oya Celasun & Mr. Xavier Debrun & Mr. Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Working Papers 2006/067, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2006/067
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    More about this item

    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;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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