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

Author

Listed:
  • Cem Cebi
  • K. Azim Ozdemir

Abstract

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.Creation-Date: 2021

Suggested Citation

  • Cem Cebi & K. Azim Ozdemir, "undated". "Non-linear effects of fiscal stimulus on fiscal sustainability Indicators in Turkey," Working Papers 2128, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:2128
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2021/21-28
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    More about this item

    Keywords

    Fiscal policy; Sustainability; Local projection; Non-Linear effects;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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