Fan-chart Approach to Forward Looking Analysis of Fiscal Sustainability in Turkey: 1958-2025


Can K.

International Conference on Empirical Economics and Social Sciences, Balıkesir, Turkey, 03 July 2021, pp.93-94

  • Publication Type: Conference Paper / Summary Text
  • City: Balıkesir
  • Country: Turkey
  • Page Numbers: pp.93-94

Abstract

ABSTRACT

In this study, we investigate the stability of fiscal posture in Turkey from a forward-looking perspective. For this 

purpose, we run 1000 stochastic simulations to construct a fan-chart to exhibit the potential trajectories of 

public debt level in the near future. The fan-chart approach enables us to monitor the worst-case scenarios and 

their likelihood of occurrence in a probabilistic viewpoint. In this manner, it can be deemed as an early warning 

mechanism for a looming potential fiscal distress. To reap the full benefits of the fan-chart approach, we 

estimate an autoregressive model with maximum likelihood technique using the data set which covers the 

1958-2020 period, which is the longest data range used in the literature in Turkey thus far. This model serves 

the purpose of a data generating process for the simulations, which involves dynamic simulations with 

incorporated coefficient uncertainty. The data used for the baseline estimation are retrieved from the IMF 

database and is defined as the ratio of total public debt to GDP level for each year. The empirical findings are 

suggestive that in the next five years, even in the worst-case scenario, the debt/GDP ratio will not exceed the 

40 % level with the probability of 90 %. This finding indicates that the debt/GDP ratio is very likely to remain in 

sub-Masctricht criteria levels in the next five years. Apart from that, the baseline forecast level of the public 

debt/DGP ratio is around 25 % which is lower than its current level. This result points to a decline in the debt 

ratio in the upcoming years which is a favourable posture for fiscal sustainability.

Keywords:Fiscal Stability, Fan-Chart Approach, Public Debt.