Fiscal debt management, accumulation and transitional dynamics in a CGE model for Turkey

ABSTRACT We use a dynamic general equilibrium model based on intertemporally optimizing agents to study alternative debt management policies for the Turkish economy. The model is based on the neoclassical growth theory in its adjustment to steady state dynamics, and on Walrasian general equilibrium theory of a small open economy in attaining equilibrium in its commodity and factor markets. Key features of the model are its explicit recognition of the distortionary consequences of excessive borrowing requirements of the public sector through increased domestic interest costs; and endogenous determination of the private work force participation decisions in response to changing tax incidences. The model results suggest that reliance on indirect taxes, as in the current stance of the fiscal authority, has appealing results in terms of attaining fiscal targets, yet it suffers from distortionary consequences and loss of economic welfare.