Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach
IMF Working Papers, March 1, 2006
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Bibliographic details
- Authors: Oya Celasun, Xavier Debrun, Jonathan David Ostry
- Published: March 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863277.001
Overview
- Authors: Oya Celasun, Xavier Debrun, Jonathan David Ostry
- Date: March 1, 2006
- Paper proposes a probabilistic approach to public debt sustainability analysis (DSA) using "fan charts" that depict the magnitude of upside and downside risks surrounding public debt projections as a result of uncertain economic conditions and policies.
- Emphasis on the role of fiscal behavior and the structure of disturbances facing the economy and arising from fiscal policy in shaping the risk profile of public debt.
- Applications illustrated for Argentina, Brazil, Mexico, South Africa, and Turkey.
Methodology
- Proposes a simulation algorithm for the path of public debt under realistic shock configurations.
- Components combined in the simulations:
- Pure economic disturbances to growth, interest rates, and exchange rates.
- Endogenous policy response to economic disturbances.
- Possible shocks arising from fiscal policy itself (fiscal policy shocks).
- Fan charts for debt are derived from the interaction between:
- The pattern of shocks, and
- The endogenous response of fiscal policy (the "marriage" between shocks and policy response).
Key findings and analysis
- Fan charts depict the magnitude of upside and downside risks around baseline public debt projections driven by uncertain economic conditions and policies.
- The paper emphasizes:
- The central role of fiscal behavior in shaping debt risk profiles.
- The influence of the structure of disturbances (economic and fiscal) on outcomes for public debt distributions.
- Illustrative country applications (Argentina, Brazil, Mexico, South Africa, Turkey) are used to demonstrate the approach and highlight limitations.
Policy implications and recommendations
- Risk assessment of public debt should incorporate:
- Probabilistic presentation of debt paths (fan charts) rather than single-point baseline projections.
- Explicit modeling of both exogenous economic shocks and endogenous fiscal policy responses.
- Consideration of shocks originating from fiscal policy behavior itself when assessing sustainability risks.
- Understanding the fiscal reaction function and fiscal policy process is important for realistic debt risk analysis.