Modeling Macro-Fiscal Interlinkages Case of Georgia

Abstract

The global financial and European debt crises exposed the need for a new
approach to fiscal modeling to support decision making analytically. With
this purpose, in the following paper we present a macro-fiscal model. By
capturing macro-fiscal interlinkages, especially those between fiscal variables and
exchange rates, the model enables to analyze various fiscal scenarios with the
focus of its impact on debt sustainability and real sector, as well as to conduct
forecasting exercises, for small open economies with potentially large share of
foreign currency denominated debt in the overall public debt. Finally, the model
is applied to Georgian economy to interpret its’ historical data, provide an
optimal policy path for future and analyze debt sustainability under several
stress scenarios.