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

Author/Editor: Celasun, Oya | Debrun, Xavier | Ostry, Jonathan David
Authorized for Distribution: March 1, 2006
Electronic Access: Free Full Text (PDF file size is 770KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
Series: Working Paper No. 06/67
Subject(s): Public debt | Emerging markets | Debt sustainability analysis
Author's keyword(s): Public debt sustainability | fiscal reaction function | risk analysis | fan charts
 
English  
    Published:   March 1, 2006        
    ISBN/ISSN:   0 / 1934-7073   Format:   Paper
    Stock No:   WPIEA2006067   Pages:   54
    Price:   US$15.00
       
     
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