^*Evan Tanner is a senior economist with the IMF Institute. Issouf Samake is an economist with the IMF African Department. The authors thank Kevin Carey (for key initial contributions) and also Adolfo Barajas, Enzo Croce Mercedes Da Costa, Xavier Debrun, Lennart Erickson, Marcelo Estevão, Alexander Hoffmaister, Hugo Juan-Ramón, Graciela Kaminsky, Philippe Karam, Martin Kaufman, Eduardo Loyo, Donal McGettigan, Vincent Moissinac, Manrique Saenz, and Alejandro Santos. For patient and wise support, we thank Maritza Hernández and Patricia Obando.

Abstract

This paper examines the sustainability of fiscal policy under uncertainty in three emerging market countries—Brazil, Mexico, and Turkey. For each country, we estimate a vector autoregression that includes fiscal and macroeconomic variables. Retrospectively, a historical decomposition shows by how much debt accumulation reflects unsustainable policy, adverse shocks, or both. Prospectively, Monte Carlo techniques reveal the primary surplus required to keep the debt-GDP ratio from rising in all but the worst 50, 25, and 10 percent of circumstances. Such a value-at-risk approach presents a clearer menu of policy options than do frameworks currently in use.