Managing Turkish debt: An OLG investigation of the IMF's fiscal programming model for Turkey

In this paper we investigate the fiscal policy alternatives on domestic debt management, cohort welfare, and growth for the Turkish economy. We utilize a model of exogenous growth in the overlapping generations (OLG) tradition with intertemporally optimizing agents and open capital markets, calibrated to the Turkish economy in 1990s. We examine the macroeconomic effects of the current IMF-led austerity program driven by the objective of attaining primary fiscal surpluses and illustrate the sensitivity of the program targets to growth shocks. Our results suggest that the current fiscal program based on the primary surplus objective succeeds in containing the explosive dynamics of debt accumulation, and yet, the path of aggregate public debt as a ratio to GNP displays significant degree of inertia and would be brought down only gradually and slowly.