A new approach on testing the behaviour of the governments towards sustainability of fiscal policy in a small-open and politically instable economy

Abstract

This study extends Bohn's (1998) model to the context of a small-open economy suffering from political and economic instabilities. A Markov-switching model is developed by incorporating a Bayesian Gibbs sampling simulation. The model is estimated for Turkish economy over the period of 1980–2001 to analyse the relationship between primary surpluses and government total liabilities. The main result of the study is that the relationship might be unstable due to the changes in intentions of the governments towards sustainability of fiscal policy.

Notes

¹ See, Bohn (1998) for more detailed discussion.

² We also found similar results from the estimation of a Markov-switching model with heteroscedastic disturbances. The results are available upon request.

³ See, for example, Drazen (2000) for an excellent survey of this literature.