Measuring fiscal stress via fiscal vulnerability index: a case of Turkish economy

Abstract

Purpose This paper aims to develop a compound measure, which is fiscal vulnerability index, provides early warning signals of fiscal sustainability problems for Türkiye's economy. Design/methodology/approach The index is constructed using twelve distinct fiscal indicators and applying the portfolio method, which considers the time-varying cross-correlation structure between the subindices. Findings Dynamics of the fiscal vulnerability index indicate that it accurately predicts to the well-known fiscal crisis occurring in Türkiye's recent history. As a result, such a compound measure should be used in the early identification of fiscal vulnerability in Türkiye. Originality/value The main contribution of this paper, relative to existing papers, is that a fiscal vulnerability index was constructed by employing the most contemporaneous method and evaluating its performance in terms of capturing historical stress periods.