Modeling Macro-Fiscal Interlinkages: Case of Georgia

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.