Testing the fiscal fatigue phenomenon in Turkey using a long-run non-linear fiscal reaction function approach

Sevda AKAR; Sevda AKAR

doi:10.3934/QFE.2019.4.645

Quantitative Finance and Economics

2019, Volume 3, Issue 4: 645-660. doi: 10.3934/QFE.2019.4.645

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Research article

Testing the fiscal fatigue phenomenon in Turkey using a long-run non-linear fiscal reaction function approach

Sevda AKAR ^,

Department of Public Finance, FEAS, Bandirma Onyedi Eylul University, Bandirma, Balikesir, Turkey

Received: 23 August 2019 Accepted: 10 October 2019 Published: 14 October 2019
JEL Codes: E62, H63, H68

The primary purpose of this study is to use a non-linear fiscal reaction function approach to investigate the fiscal fatigue phenomenon in Turkey. Quarterly data for the years of 2001 through 2018 were analyzed using fully modified ordinary least squares (FM-OLS) and threshold models. The results from both the FM-OLS and threshold models provide evidence about the presence of the fiscal fatigue phenomenon in Turkey. The primary balance has minimum and maximum values at debt levels of about 30% and 80%,respectively. The primary balance begins to decrease after the maximum value is achieved; negative values are reached at a debt level of about 110%. Therefore,it is recommended that Turkey focus on fiscal sustainability and the risk of external shocks by implementing a fiscal discipline policy. In addition,a primary surplus targeting principle should be implemented,to carry out the sustainability of the liabilities and the fiscal targets.
- fiscal fatigue,
- non-linear fiscal reaction function,
- debt limits
Citation: Sevda AKAR. Testing the fiscal fatigue phenomenon in Turkey using a long-run non-linear fiscal reaction function approach[J]. Quantitative Finance and Economics, 2019, 3(4): 645-660. doi: 10.3934/QFE.2019.4.645

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Abstract

The primary purpose of this study is to use a non-linear fiscal reaction function approach to investigate the fiscal fatigue phenomenon in Turkey. Quarterly data for the years of 2001 through 2018 were analyzed using fully modified ordinary least squares (FM-OLS) and threshold models. The results from both the FM-OLS and threshold models provide evidence about the presence of the fiscal fatigue phenomenon in Turkey. The primary balance has minimum and maximum values at debt levels of about 30% and 80%,respectively. The primary balance begins to decrease after the maximum value is achieved; negative values are reached at a debt level of about 110%. Therefore,it is recommended that Turkey focus on fiscal sustainability and the risk of external shocks by implementing a fiscal discipline policy. In addition,a primary surplus targeting principle should be implemented,to carry out the sustainability of the liabilities and the fiscal targets.

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