Estimating Bohn's Fiscal Sustainability Model with Temporal Variation: Evidence from Turkey
Estimating Bohn's Fiscal Sustainability Model with Temporal Variation: Evidence from Turkey

Summary/Abstract: This study aims to estimate a dynamic fiscal reaction function in a state-space setting to obtaintime-varying reaction parameters for appraising the evolution of public debt sustainabilityin Turkey. The data set used for estimation is the longest for Turkey in the literature. Succinctlyspeaking, this function quantifies the corrective fiscal efforts exerted to preserve the stabilityof public debt. The time-varying estimation findings in this study suggest that the recent fiscalhistory of Turkey can be divided into two subperiods in terms of fiscal stability. Before the mid1990s, no systematic fiscal response existed to restore the stability of public debt, whereas afterthe mid-1990s, a remarkable effort was evidenced by the positive fiscal reaction parameters.Notwithstanding some 20 years of strong positive reactions, the former performance appearsto be far-off in recent years, and the strength of fiscal reaction has waned gradually, which isperturbing for the future course of fiscal sustainability.

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