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

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.