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

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. 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. 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. 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.