Non-linear effects of fiscal stimulus on fiscal sustainability Indicators in Turkey

Non-linear effects of fiscal stimulus on fiscal sustainability Indicators in Turkey

21/28

English

November 2021

This study aims at investigating the non-linear effects of government spending shocks on fiscal sustainability indicators in Turkey for the period of 2001:q1 – 2020:q4. Using the local projection method and separating government spending into two main components, namely public consumption and public investment, we examine the effects of a fiscal stimulus shock on debt-to-GDP ratio, Treasury interest rates, CDS risk premiums, output and inflation under two different debt regimes. The debt regimes (high and low) are determined by a logistic transition function regarding with debt-to-GDP ratio. We find some evidence on state-dependent features of fiscal stimulus on macro variables (output and inflation) and fiscal sustainability indicators. Particularly, we conclude that the implementation of expansionary fiscal policy via an increase in government spending in a low-debt regime would help to improve fiscal sustainability as well as the effectiveness of the fiscal policy. On the other hand, an increase in government spending in a high-debt regime generally produces lower output gains and higher budgetary costs. As a result, this study highlights the fact that the timing of fiscal actions, accurate assessment of debt regimes and composition of government spending matters.

Fiscal policy, Sustainability, Local projection, Non-Linear effects

E62; H50; H63; C32