34. International Public Finance Conference

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DOI :10.26650/PB/SS10.2019.001.046   IUP :10.26650/PB/SS10.2019.001.046    Full Text (PDF)

Estimating Fiscal Space: an Empirical Study on Turkey

Fatih Akbayır, Ahmet Burçin Yereli

In this study, Turkey’s fiscal space is estimated by using Ostry et al. approach. It is aimed to contribute to literature by estimating fiscal space of a developing country for the first time with this approach. At first, fiscal reaction function and interest rate – growth rate differential are estimated for Turkey. Debt limit is determined by combining the reaction function and the differential. Thereafter, it is reached to Turkey’s fiscal space subtracting current debt (in percent of GDP) from the debt limit. Accordingly, when all risks are ignored, Turkey’s fiscal space is approximately 37% of GDP. The main reason of this relatively high ratio are realizing primary surpluses thanks to the fiscal discipline and providing high growth rates which reduce debt/GDP ratio for many years. But, given the risks arising from Turkey’s structural economic characteristics, it is observed that Turkey’s fiscal space decreased significantly. Accordingly, governments in Turkey should pay attention to contingent liabilities about treasury guarantees given in the direction of the PPP investment model and social security deficits. Because these factors negatively affect the fiscal space. In this respect, reducing the risk of exploitation of the fiscal space requires preserving continuity of high level of primary balance and some structural reforms, mainly related to the current account deficit.


Keywords: Fiscal reaction function, differential, debt limit, fiscal space, Ostry et al. approach, Turkey
JEL Classification : E62 , H62 , H69

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